I am a macroeconomist with interests in theory and methods. My subfields are listed below.

In *Macro theory *I try to combine general equilibrium theory with the stochastic process literature in order to derive computable structures for infinite horizon non-optimal economies. In this sense, I am extending GE theory beyond existence results in order to be able to characterize numerically and empirically macro models. I have 3 papers in this field: i) an applications to heterogeneous agents economies, ii) a project on emerging market crises, iii) a paper on asymmetric fiscal policy in closed economies.

In *Applied Recursive Macro *I develop applications of minimal state space recursive macro models. I evaluate these models empirically using different structural estimation techniques. I have 5 papers in this field: i) a project on financial crises and macro prudential policies estimated using “hitting times” of markov processes. ii) I also study the pass through of monetary policy instruments, calibrating the model to Latin American data. iii) I estimate a state, time and sign dependent tax policy multiplier using calibration. iv) I develop a theoretical framework to understand the interaction between sovereign default and sudden stops. v) I study the relevance of lenders’ heterogeneity (in preferences and wealth) on financial market crises using a novel data base containing a panel of brokers’ sovereign debt transactions across time. vi) I investigate the effects of uncertainty in the optimal maturity structure of sovereign debt.

In *Recursive methods *I combine recursive equilibrium theory and computer science to measure the performance of standard algorithms. I have 2 papers in this field: i) a project on the accuracy of minimal state space methods for non-optimal economies. ii) I also estimate the rate of convergence and accuracy of the Value and Policy Function Iteration algorithms for efficient economies with price independent inequality constraints.

In *Search models *I study recursive economies with risk averse agents and non-segmented labor markets. I use them to undertand the effects of pension reforms and different regulations on several unemployment characteristics. I have 2 papers in this field: i) a project on the effects of social-security reforms in Chile, ii) I study the interaction between income risks and liquidity constraints for the 2008 pension reform in Argentina using a novel data base with a panel of 2 million observations.

*Below you can find a list of extended abstracts for each project *

i) Useful Results for the Simulation of Non Optimal General Equilibrium Economies

Job Market Paper

This paper investigates the empirical evaluation of infinite horizon non-optimal economies with heterogeneous agents by means of numerical simulations. In particular, the paper answers the following question: is it possible to derive a general framework which guarantees that numerical simulations truly reflect the behavior of endogenous variables in the model? Under mild assumptions, this paper provides an affirmative answer to this question for endowment economies with incomplete markets, heterogeneous agents and infinitely many exogenous states. For this type of models, the paper also presents an accurate calibration method. For economies with finitely many shocks, even under stronger assumptions, it is only possible to show that a numerically computable, time independent and recursive representation of the sequential equilibrium generates a stationary Markov process, which is a necessary condition to answer the above mentioned question.

*Link to the paper and on-line appendix *: https://damianpierri.com/research

ii) Memory, Collateral and Emerging Market Crises: A Qualitative Approach with Quantitative Implications

Joint with K. Reffett

We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in small open economies with price dependent equilibrium collateral constraints. These models are known to have multiple equilibria. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for a much more flexible approach to modeling memory and multiple equilibrium in models with equilibrium price-dependent collateral constraints. We construct ergodic GME selections from the sequential competitive equilibrium that at the same time can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recovery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and a non-stationary GME selections, and we find that a) the ergodic GME selectors generate stochastic dynamics which are less financially constrained, b) non-stationary GME selections exhibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. Finally, from a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, and provide a complete constructive qualitative theory of recursive equilibrium comparative statics in deep parameters of these economies. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “self-fulfilling” under rational expectations .

*Link to the paper and presentation: * https://damianpierri.com/research

iii) Asymmetric fiscal policy: theory and practice

Joint with Juan Pablo Gama and Kevin Reffett

We build on the asymmetric business cycle theory (Hansen and Prescott, 2005) to develop a novel equilibrium notion which allows to replicate the global dynamics in a possibly inefficient economy subject to fiscal shocks. The theoretical structure is sufficiently general to compute and simulate tax and Government expenditure shocks of an arbitrary magnitude which may affect the behavior of the economy differently depending on the position of the economy along the cycle. We prove the existence of a sequential and of a recursive equilibrium for this economy. Under an additional set of assumptions, the sequential equilibria can be computed directly from the system of equations characterizing the dynamic behavior of the economy. Under milder assumptions, we can compute the recursive equilibria.

*Work in progress*

i) The empirical dimension of overborrowing. **Submitted**

Joint with G. Montes Rojas and P. Mira

Persistent current account deficits are common among low- and middle-income countries. We evaluate when this situation triggers a sudden stop crisis. Using a non-parametric estimator, we find a critical value for the yearly current account deficit just before the crisis sets off and these findings give rise to an empirical measure of overborrowing: countries that have increased their external indebtedness by an accumulated amount of at least 26%-31% of the GDP in a time span of 3 to 5 years are more prone to be hit by a sudden stop crisis. The typical crisis produces a consumption drop of 4% and a current account reversal of 2.5-4.5% of GDP. We also contribute to the structural characterization of sudden stops. Using a canonical model, we can replicate these stylized facts. Moreover, we compute the corresponding ratio of net debt to GDP. This parameter is two or three times bigger than the benchmark value in the literature, a fact that improves the empirical performance of the model. From a policy perspective, our findings help to elaborate leading indicators to anticipate a sudden stop.

*Link to the paper: https://damianpierri.com/research*

ii) Incomplete interest rate pass through: a recursive partial equilibrium approach

Joint with M. Cherkasky and L. Trajtenberg

The empirical literature provides robust evidence on the incomplete pass through (IPT) of monetary policy instruments on market rates. However, the coefficients found are not similar across regions, ranging between 0.25 and 0.75. Also, the theoretical literature has not provided a comprehensive framework which can explain this fact satisfactorily. This paper proposes a recursive partial equilibrium model that generates a PT coefficient between 0.5 and 0.6. The model is calibrated for Latin American economies where the active (passive) rate is above (below) the policy rate and the spread is stable. These facts allow explaining the IPT: after a tightening in the monetary policy, banks switch the composition of their assets from loans to central bank notes. This change allows them to reduce the effects on earnings caused by the tightening provided that there is an IPT in the passive rate and that this rate is below the policy rate. The stability of the spread explains the PT in the active rate. In order to obtain the IPT coefficients, this paper derives a structural estimation of the supply elasticity of deposits and demand elasticity of loans. The former ranges between 3.0 and 4.0 and the latter between -1.5 and -2.0. These results suggest that the efficiency of the monetary policy might be affected more by an incomplete PT than by the lack of sensibility of loans and deposits.

*Link to the paper: https://damianpierri.com/research*

iii) Asymmetric business cycles and fiscal policy: the effect of idle capacity.

Joint with G. Montes Rojas and Domenico Ferraro

We study the asymmetric effect of tax shocks depending on its sign and position along the business cycle. Our empirical findings show that only a tax cut in expansions is statistically significant for investment. We build a novel theoretical structural model to replicate several characteristics of fiscal policy and test their influence on the outcome of exogenous tax changes. This allows us to study the asymmetric effects of tax policies as a consequence of idle capacity and the convexity of the marginal productivity of labor. We allow for differentiated effects depending on time, order of magnitude, sign and position along the cycle in a simple RBC model .

*Work in progress*

iv) Default Risk and Fiscally induced sudden stop

Joint with H. Seoane and A. Vicondoa

To our knowledge the literature has taken care separately of sudden stops on private external debt and of defaults on public debt. This paper is the first attempt to model the effects of sovereign default on private expenditure when external debt is mainly issued by the public sector and there is a positive probability of suffering a sudden stop. The model takes the standard structure in models with financial frictions in small open economies as in Bianchi (2011) and introduce default sobering risk using a framework adapted from Lorenzoni and Werning (2019). In order to structurally estimate the model, we compute directly the sequential equilibria exploiting the finite time assumption inherited from Lorenzoni and Werning (2019).

*Work in progress.*

v) The importance of the buy side in emerging market crises

Joint with S. Barraza and F. Roldan

The macro literature since Mendoza (91) have modeled emerging market crises as a shortage in international lending. The focus is always on the behavior of the borrower. But, what about the lender? As a consequence of assuming that lenders have great tolerance to risk and that are price takers, financial market equilibrium is dichotomous: the borrowers fix the amount of the debt issuance and the lender decides the price. More to the point, the wealth distribution of lenders is irrelevant. Based on a novel data set, this paper challenges these assumptions. We document the position in Argentinean sovereign debt bond by bond and broker by broker. We found not only that the availability of funds, represented by the net worth of each “brand” of mutual funds, is crucial but also that investment decisions are irreversible. We also observe that in each debt issuance (primary auctions) the fraction purchased by a particular hedge fund is no larger than 5%, suggesting a competitive behavior.

*Work in progress.*

vi) Uncertainty and Maturity Structure

Joint F. Roldan

We investigate the effect of heightened uncertainty on the optimal time-consistent fiscal policy. We consider a planner who lacks commitment to future policy actions and faces shocks to the value of government spending. When uncertainty is temporarily large, the planner has an incentive to tilt its debt issuance towards the long end. In `normal times' levels of uncertainty, however, the planner prefers to issue equal amounts at all horizons to avoid costs from lack of commitment, as is well known in the literature.

*Work in progress.*

i) Accuracy in Recursive Minimal State Space Methods

Joint with J. Martinez

The existence of a recursive minimal state space (MSS) representation is not always guaranteed. This fact has numerical implications: a constructive existence proof generates a convergent algorithm which maybe different from the standard practice. What are the consequences of computing and simulating a model without this type of proofs? To answer this question, we identify a condition which is associated with a convergent and computable MSS representation in a RBC model with taxes. This condition ensures the existence of a benchmark equilibrium that can be used to test frequently used algorithms. To verify the accuracy of simulations even if this condition does not hold, we derive a closed form recursive equilibrium which contains the MSS representation. Both benchmark representations are accurate and ergodic. We show that state of the art algorithms, even if they are numerically convergent, may underestimate the benefits of capital taxes and overestimate their cost by at least 65%, a figure which is in line with recent findings using accurate benchmarks. If the existence of a MSS equilibrium cannot be proved, we found 2 sources of inaccuracy: the lack of a convergent operator and the absence of a well-defined (stochastic) steady state. Moreover, we identify a connection between the lack of convergence in the MSS algorithm and the equilibrium budget constraint which implies that simulated paths may be distorted not only in the long run but also in any time period. When we have a constructive proof, inaccuracy is generated by the lack of qualitative properties in the computed policy functions; a fact which precludes sup-norm convergence.

*Link to the paper: https://damianpierri.com/research*

ii) Theoretical Error Bounds for the Value and Policy Function Iteration Algorithms: An Application for Recursive Dynamic Models with Inequality Constraints.

Winner of the Society for Computational Economics Contest 2011

This paper derives theoretical error bounds for the Policy and Value Function Iteration algorithms applied to Recursive Dynamic Models with continuous decision variables and inequality constraints. This paper proves two main theorems. The first one uses a recent result due to Santos and Rust (2004). The theorem extends the result by combining a feasible version of the Policy Function Iteration algorithm with the barrier method for a model with an arbitrary number of state and decision variables. This constitutes a significant difference with the original theorem, since it is no longer necessary to assume the interiority of the solutions. The Algorithm converges at a rate of 1.5 for a given grid size. The second theorem, for problems with only one continuous endogenous state variable, uses a feasible version of the Value Function Iteration Algorithm, the barrier method and a cubic Variation Diminishing Spline Approximation. The algorithm converges at a linear rate, given the grid size. Finally, under a certain configuration of the parameters, the maximization problem in this last theorem is in the convex class, which can be solved in polynomial type complexity, and the policy function is first order differentiable. These last results enables the algorithm to avoid the Course of Dimensionality for the maximization problem in the Bellman Equation and the use of first order perturbation methods, thus, constitutes an extension of existing theorems that deals only with equality constraints (see Judd, 1994).

*Link to the paper & Presentation (a new version is coming joint with L. Bali): https://damianpierri.com/research*

i) Life Cycle, financial frictions and informal labor markets, **Revised and Resubmitted to the Journal of Applied Economics**

Joint with E. Kawamura

In this paper we study the implications of economic policies that affect household's income. We focus on Chile after the massive demonstrations against the existing standard of living observed in 2019. Using a search model with life-cycle features and survey data, we found that an equivalent change in labor tax rates and non-contributary pensions have opposite effects on labor markets, specifically on informality and unemployment duration. Non-contributary pensions offers a milder trade-off as it produces a second order increase in informality. However, due to the presence of informal labor markets and financial frictions, non-retired agents increase their current consumption only after a tax cut. That is, in this framework, a positive wealth shock can reduce consumption. Thus, when we take into account the impact on welfare, as households are assumed to value only consumption, cutting taxes seems to be preferred. We characterize labor market and consumption-savings decisions. We found 2 effects operating simultaneously and in opposite directions: substitution and wealth. Due to the presence of risk averse agents and incomplete capital markets, the latter prevails suggesting that the life cycle aspects of the labor market are critical to understand policy trade-offs.

*Link to the paper: https://damianpierri.com/research*

ii) A measure of the wealth distribution for Argentina: implications for the labor market and the pension system.

Joint with D. Trupkin

Using a panel of 2 million observations we can keep track of the labor market history of a subset of the formal labor market in Argentina. The data allows me to estimate the wealth distribution of non-retired agents using a search model with risk averse agents. We then can compute the effect of different fiscal policies on the labor market conditional on the position on the income and wealth distribution of each worker.

*Work in progress.*

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