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Working papers:

  • Learning about Debt Crises
    The European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element, and support that claim with empirical evidence on the evolution of GDP forecast errors in years 2008-2014. I build a quantitative model of sovereign default where output features rare disaster risk and agents learn about its realizations. Debt crises coincide with economic depressions and develop gradually, while markets update their expectations about future income. Calibrated to Portuguese economy, the model replicates the comovement of bond spreads and output before and after 2008.
  • Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance, joint work with Pei Cheng Yu
    Life insurance premiums have displayed a significant degree of rigidity over the past two decades. On average, prices took over 3 years to adjust and the magnitude of these one-time jumps exceeded 10%. This stands in sharp contrast with the dynamics of the corresponding marginal cost which exhibited considerable volatility since 1990 due to the movements in the interest and mortality rates. We build a model with consumer hold-up problem that captures these empirical findings. Price rigidity arises as an optimal response to the relationship-specific investment the consumers need to make before buying. The optimal contract takes the form of a simple cutoff rule: premiums are rigid for all cost realizations smaller than the threshold, and adjustments must be large and are only possible when cost realizations exceed it.

    Poster presented at 2014 North American Summer Meeting of the Econometric Society