My fields of specialization are International Finance and
Open-Economy Macroeconomics with emphasis on financial
intermediation and business cycles, banking, and global capital flows.
Currently, I am working on my dissertation papers and a paper on
fiscal sustainability. I wrote my dissertation under the direction of
Enrique Mendoza (then at Duke University) and I learned numerical
methods from Paul Fackler, who
also served on my dissertation committee.
Two of my three dissertation papers explore the role of banks
that intermediate inflows of foreign capital into a small open economy
(SOE). These papers provide a quantitative analysis of the
macroeconomic implications of financial intermediation under
alternative representations of the relationship between international
lenders, banks, and domestic borrowers.
The dissertation research was motivated by the contrast between two key
predictions of standard business cycle models of a SOE and the actual
sources of macroeconomic instability in emerging countries. First, in
the standard model domestic fluctuations are almost neutral to
international-interest-rate shocks. Second, when the SOE has access to
a frictionless world capital market, capital inflows are demand
determined. However, the sudden capital outflows affecting emerging
markets seem to indicate that the behavior of investors bear a closer
look, as it does the alternative mechanisms through which the cost of
international capital impacts on the macroeconomic developments of
emerging economies.
I model banks following two typical approaches in the banking
literature, namely, the industrial organization and the asymmetric
information approach. In the first paper, profit-maximizing
neoclassical banks employ capital and labor to produce intermediation
services. Banks are the only domestic agents with access to
international financial markets. They borrow from foreign creditors and
lend to domestic households and firms. Household borrow to smooth
consumption and firms to finance their working capital. The
quantitative analysis of the stochastic dynamic general equilibrium
allocations of the economy indicates that the model with neoclassical
banks is unable to reproduce the large output swings associated with
capital outflows observed in actual emerging economies. Also, the
volatility of domestic financial variables is consistent with actual
statistics only when the banks' supply of funds has a finite elasticity.
In the second paper (the job-market paper), I model banks in an
incomplete information setting with non-diversifiable aggregate risk
(i.e. macroeconomic risk). Agency costs arise at the level of the firms
and at the level of the bank, and therefore international investors
have to `monitor a monitor'. The optimal funding mechanism to bring
working capital from abroad is a two-sided debt contract between firms,
banks, and international investors. Banks are risky because their
portfolio return hinges upon the macroeconomic stance and a
sufficiently adverse productivity shock can trigger a financial crash.
Under this setting, banking crises are driven by fundamentals and macroeconomic
risk. The model is consistent with the empirical evidence on
banking crises because either a slowdown of the economy or a world
interest-rate hike tends to breed banking sector problems. Furthermore,
the model predicts that capital flows and the country-specific interest
rates are endogenous and important to explain domestic fluctuations.
This is because, in a world of forward looking economic agents, the
aggregate risk affects business cycles inasmuch as all agents
incorporate the endogenously determined probability of a crisis into
their economic decisions.