Research Statement

I am a macroeconomist with an interest in theory and methods.

All macro models rely on stability and ergodicity: that is, equilibrium dynamics implied by a macro model are useful as long as they remain (i.e., fluctuate) around a mean (i.e., do not drive apart).

My research agenda is to design methods that allow us to obtain these dynamics in economies subject to friction. In optimal economies, Stokey, Lucas, and Prescott (1989) provide all the results we need; in non-optimal economies (with frictions), things are different, and here is where the core of my agenda lies.

My subfields are listed below.

In Macro theory, I combine general equilibrium theory with the literature on stochastic processes to derive computable structures for infinite horizon non-optimal economies with representative and heterogeneous agents. In this sense, I am extending GE theory beyond existence to be able to characterize macro models numerically and empirically.

In Applied Recursive Macro I develop applications of minimal state space recursive macro models. I evaluate these models empirically using different structural estimation techniques.

In Recursive methods, I combine recursive equilibrium theory and computer science to measure the performance of standard algorithms.

I study recursive economies with risk-averse agents and non-segmented labor markets in Search models. I use them to understand the effects of pension reforms and different regulations on several characteristics of unemployment.

Below, you can find a list of selected abstracts for each sub-field

Abstracts of selected papers

Macro Theory

i) An Ergodic Theory of Sovereign Default

We present the conditions under which a sovereign default model of private external debt dynamics is stationary, ergodic, and globally stable. As our results are constructive, the model can be used to compute global long-run stylized facts accurately. Default can be used to derive a stable unconditional distribution. Thus, the government uses the default of private external debt as a stabilization policy. A quantitative application of our theory studies the long-run effects of high world interest rates, which are associated with larger private debt positions and fatter left tails of the asset distribution.

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

Applied Recursive macroeconomics

i) Multi-Plant Firms, Variable Capacity Utilization, and the Aggregate Hours Elasticity, joint with D. Ferraro

We develop an equilibrium business cycle model of multi-plant firms with perfectly competitive product and labor markets. Plant-level production features a minimum labor requirement, leading to occasionally binding capacity constraints at the firm level. The aggregate production function is kinked, displaying constant returns to scale when the economy is below capacity and decreasing returns when at capacity. We calibrate the model to U.S. data and show that the effects of distorting taxes are highly nonlinear and state-dependent, varying systematically with the state of the business cycle. The aggregate hours elasticity is higher in recessions and decreases with the size of the labor tax cut. Moreover, it differs from the structural preference parameter determining the individual-level labor supply elasticity.

ii) Recurrent Anticipated Liquidity Shocks and Household Expenditure: An Empirical Analysis in Inflationary Contexts, joint with H. Cardozo.

We exploit a novel panel of thousands of monthly bank accounts to examine households’ responses in Argentina during a high inflation period to a predictable and periodic liquidity shock—the regular biannual bonus (RBB). We find household spending highly responsive to the RBB, with durable goods rising sharply in maintenance and operational costs. Also, households use the RBB to cancel debt. We develop a model that successfully replicates expenditure patterns and underscores the risks of durable goods. Our study highlights the critical role of durable goods in shaping spending responses to anticipated and recurrent liquidity shocks in inflationary economies.

Link to the papers: https://damianpierri.com/research

Recursive Methods

i) Accuracy in Recursive Minimal State Space Methods

The existence of a recursive minimal state space (MSS) representation is not always guaranteed. However, because of its numerical efficiency, this type of equilibrium is frequently used in practice. What are the consequences of computing and simulating a model without a constructive proof? To answer this question, we identify a condition which is associated with a convergent and computable MSS representation in a RBC model with state contingent 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 capital (and thus overestimate the benefits of capital taxes) by at least 65%, a figure which is in line with recent findings using accurate benchmarks. When an existence proof is not available, 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 lack of convergence and the equilibrium budget constraint which implies that simulated paths may be distorted not only in the long run but also in any period. When we have a constructive proof, inaccuracy is generated by the lack of qualitative properties in the computed policy functions.

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

Partial equilibrium search models

i) Life Cycle, financial frictions and informal labor markets, 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