High-Frequency Fiscal Shocks (with J. Zachary Mazlish)
We introduce a new methodology for identifying high-frequency fiscal shocks using Large Language Models. We apply this method to 1947-2025 US data. Our results show that the model successfully mimics a "professional forecaster" of the current and future US fiscal position, and is able to recover similar shocks to what have already been identified in the narrative fiscal shock literature. We then examine the effects of fiscal shocks on asset prices: in response to a 1pp shock to the present-value of the current and next ten-years deficits, ten-year Treasury yields rise more than 30bps, with real yields and break-even inflation expectations both contributing to the rise. The dollar appreciates significantly — as much as 4.8% — and the 2Y-10Y spread rises 16-24bps. Turning to macroeconomic outcomes, our fiscal shocks produce government spending multipliers in the 0.5-1 range. Tax shocks shows strong signs of anticipation, and using our data to account for anticipation, we find that output and consumption fall by more than 2% in anticipation of a 1% of GDP tax cut. The multiplier for an anticipated tax shock is 1.2, smaller than typical estimates.Sovereign Default Crises, Fiscal Austerity, and Corporate Default (with Sergio de Ferra)
During the Eurozone debt crisis, Italy suffered from an increase in sovereign borrowing costs followed by a sharp fiscal tightening and a reduction in credit to firms. What is the link between sovereign default risk and firms' credit? We propose a transmission channel from sovereign debt crises to firm-level financial frictions through the action of fiscal policy. Using firm-level data for 10 European economies, we show that firm default risk, credit conditions, and performance deteriorate following fiscal consolidations, with a larger impact on firms in the non-tradable sector. We then address this question in a model of endogenous sovereign default in which lending to firms is risky. A fiscal contraction in the crisis country causes a reduction in firms' profits and an increase in their default risk. Firms are heterogeneous in the degree to which the crisis affects them: those in the non-tradable sector are more vulnerable, as the crisis causes demand for their output to fall. Finally, as observed in Italy, the sovereign crisis leads to a contraction in economic activity.Fiscal Policy and Sudden Stops in Open Economies
This paper examines the effects of fiscal policy during balance-of-payments crises and how they differ across countries. Using a quarterly panel dataset of 45 advanced and emerging economies, I find that government spending multipliers on consumption, the trade balance, and the real exchange rate are higher during sudden stops in capital inflows for emerging economies, but not for advanced economies. To rationalize this, I build a small open economy New Keynesian model with incomplete markets where the state-dependence of fiscal policy is driven by the currency denomination of external debt. When debt is owed in foreign currency -- a salient feature of emerging economies -- a sudden stop generates a debt-deflation mechanism due to currency mismatch. A fiscal expansion that appreciates the real exchange rate therefore relaxes the borrowing constraint and crowds in consumption. However, when households borrow abroad in local currency as in most advanced economies, this mechanism is absent and the difference in fiscal multipliers across financial states disappears.Unequal Decoupling (with Sergio de Ferra, Kurt Mitman, and Federica Romei) (in progress, draft available upon request) [slides]
Who gains and who loses from geopolitical fragmentation? We develop a general-equilibrium, quantitative framework that incorporates cross-country heterogeneity in income and wealth inequality, capturing rich income dynamics in both advanced and emerging economies. We then consider two fragmentation scenarios: the closure of the United States or of China to trade and financial flows with the rest of the world. We find that in the United States, only households at the top of the wealth distribution experience welfare gains in both scenarios, while all other households incur losses. Outside the United States, the average welfare outcome is generally positive when the United States closes, as capital becomes more abundant in all countries. The reverse is generally true when China ceases lending. These average effects mask significantly heterogeneous impacts of these shocks on workers and owners of capital in each country.Parsing the Fed (with Peter Karadi and Marek Jarocinski) (in progress)