Prices and Symmetries (with Andrew Koh) Latest version: September 2025
We analyze optimal interventions in networked economies with stochastic linkages. Linear taxes dominate quotas whenever shocks are symmetric because the ensuing equilibrium adjusts toward the first-best allocation, thereby correcting policy mistakes—vice versa for antisymmetric shocks. Flexible interventions can implement the first-best allocation for each realized network whenever shocks are symmetric. Our results offer optimality foundations for price interventions when shocks have a large common component, and for quantity instruments when policymakers are concerned about the correlation structure across links.
[SSRN]
We study the identification of non-linear causal effects of macroeconomic shocks using local projections augmented by a non-linear function of the shock of interest. Our analysis focuses on two types of non-linearities: by size and sign of the shock. We characterize the estimand of our non-linear local projections. Our main result is that the local projections identify pure sign non-linearities when they include an even non-linear function of the shock and vice-versa for size non-linearities and odd functions. We illustrate our method with an application to oil supply news shocks, documenting evidence in favor of size (but not sign) non-linearities.
[SSRN] [Code]
We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.
[SSRN] [NBER WP31763]
Dollarization Dynamics (with Tomás E. Caravello and Iván Werning) Latest version: August 2023
This study explores the consequences of dollarizing an economy with an initial dollar shortage. We show that the resulting transitional dynamics are tantamount to that of a “sudden stop”: consumption of tradable goods fall, the real exchange rate depreciates abruptly by a discrete drop in domestic prices and wages followed by a gradual appreciation from positive inflation. With nominal rigidities the economy first falls into a recession. This is true even if all prices and wages are allowed to adjust flexibly on impact. The subsequent recovery in activity always “overshoots” the steady state: the non-tradable sector transitions from the initial recession to a boom, then asymptotes to its steady state.
[SSRN] [NBER WP31296]
