Publications:
“Extrapolative Expectations and Capital Flows during Convergence” (with Guido Cozzi) Journal of International Economics
How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income.
“Can Sticky Portfolios Explain International Capital Flows and Asset Prices?” (with Philippe Bacchetta and Eric van Wincoop) Journal of International Economics
Over the past decade portfolio choice has become an important element of many DSGE open economy models. However, there is a substantial body of evidence that is inconsistent with standard frictionless portfolio choice models. In this paper we introduce a quadratic cost of changes in portfolio allocation into a two-country DSGE model. We investigate what level of portfolio frictions is most consistent with the data and the impact of portfolio frictions on asset prices and net capital flows. We find that the portfolio friction can account for (i) micro evidence of portfolio inertia by households, (ii) macro evidence of the price impact of financial shocks and related disconnect of asset prices from observed fundamentals, (iii) a broad set of moments related to the time series behavior of saving, investment and net capital flows, and (iv) phenomena such as excess return momentum, reversal and post-earnings announcement drift. For a plausible level of the friction, financial and saving shocks each account for close to half of the variance of net capital flows.
Working Papers:
“External Asset Positions, Demography and Life Cycle Portfolio Choice” (with Katja Mann)
How do demographic differences between regions affect external positions in safe and risky assets? We answer this question focusing on the US vis-à-vis 15 European Union member states. The US bilateral position is characterized by risky assets alongside safe liabilities. At the same time, the US population is relatively younger. We present a structural model of two fully integrated regions, which differ by the age structure of their populations. Multiple overlapping generations of agents choose a portfolio of safe and risky assets over the life cycle. We show that the younger region has a higher relative demand for risky assets, inducing international asset trades. In a simulation starting in 1990, we replicate the observed positions between the US and the European countries. We predict the risk asymmetry will persist until the end of the century, but a reduction in the magnitude of safe positions around 2040. Safe returns decline throughout, whereas the equity return premium first falls and then remains relatively stable. Demographic asymmetry between regions accounts for about one-fifth of the observed decline in real interest rates over the 1990 to 2020 period. Our structural approach is important: while the effect of changing age distributions is large, there are significant endogenous responses to households’ financial decisions. In a decomposition exercise, we show the strongest demographic drivers of life cycle responses are a decline in the share of workers and increasing longevity.
“The Time Path of Productivity Convergence and the International Allocation of Capital” (submitted)
Can cross-country heterogeneity in the time path of technological convergence account for observed allocation of international capital? The time path of technological convergence varies significantly across countries, whereas previous studies assume a common cross-country convergence path and one that is linear. We show that the time path of a country’s technological convergence has important implications for the predicted size of capital inflows from the rest of the world. Accounting for this observed heterogeneity accounts for around 20 percent of the puzzling allocation of capital across developing economies relative to neoclassical predictions, without the introduction of additional distortions common in the existing literature. Cross country differences in convergence paths are not powerful enough to account for capital outflows observed in particularly fast-growing Asian economies, but go a long way in explaining why the fastest developing and converging economies are not receiving capital inflows in the magnitude predicted by the standard neoclassical model.
Works in Progress:
“Scaling up EPFR Data”, with P. Bacchetta and E. van Wincoop
“Medium Frequencies with Endogenous Human Capital”, with M. Bolboaca and G. Cozzi
“Richer Earnings Dynamics and Portfolio Choice in the Macroeconomy”