Research & Work in progress
Job Market Paper
The Optimal Design of Climate Agreements: Inequality, Trade, and Incentives for Climate Policy
JMP Draft (preliminary, update coming soon). JMP Slides here.
Presentations: E-axes Forum for Junior (webinar link), Climate Frontiers (Climate Institute, UChicago), Chicago Fed Brown Bag (Chicago), Summer Session for Young Scholars (MFR-BFI, UChicago).
Abstract: Fighting climate change requires ambitious global policies, which are undermined by free-riding incentives. The heterogeneity in both the impacts of climate change and the costs of carbon taxation exacerbate non-cooperation, which makes the implementation of multilateral climate agreements difficult. This paper studies how to design an optimal climate club — in the spirit of Nordhaus (2015) — to maximize global welfare, incorporating strategic behavior when countries can exit climate agreements. In an Integrated Assessment Model with heterogeneous countries and international trade, I study the choice of countries in the agreement, the optimal level of carbon tax that members set on fossil fuels, and the tariffs they impose on non-members to incentivize participation. The decision balances an intensive margin — a club with few countries and large individual emission reductions — and an extensive margin — accommodating more countries at the cost of lowering the carbon tax. I find that the optimal climate club consists of all countries except Russia, a \$100 tax per ton of $CO_2$ within the club, and a 50$\%$ tariff on goods from non-members. In contrast, the globally optimal carbon tax is \$150 when free-riding is absent. In several extensions, I study additional policy instruments, such as transfers or fossil-fuel-specific tariffs, and examine the effects of trade retaliation for the stability of climate agreements.
Working Papers
Inequality, Climate Change, and the Optimal Climate Policy
In progress, 2024
Slides here, Draft here (preliminary).
Presentations: NBER-SI Macro-Public Finance (Boston), SED (Barcelona), EEA Meeting (Rotterdam), Yiran Fan Memorial Conference (UChicago).
Abstract: What is the optimal policy to fight climate change? Taxation of carbon and fossil fuels has strong redistributive effects across countries: (i) curbing energy demand is costly for developing economies, which are the most affected by climate change in the first place, (ii) taxation has strong general equilibrium effects through energy markets and trade reallocation. Through the lens of an Integrated Assessment Model (IAM) with heterogeneous countries, I show that optimal carbon policy depends crucially on the availability of redistribution instruments. After characterizing the Social Cost of Carbon (SCC), I derive formulas for second-best fossil fuel taxes in the presence of inequalities in climate damages and incomes, redistributive and distortionary effects on energy markets. I show that a uniform carbon should be reduced twofold in the presence of inequality. If country-specific carbon taxes are available, the distribution of carbon prices is proportionally related to the level of income: poor and hot countries should pay lower energy taxes than rich and cold countries. These qualitative results are general and I propose a dynamic quantitative model to provide recommendation for the optimal path of carbon tax.
Supply Chain Uncertainty and Diversification
joint with Ignacia Cuevas and Gustávo Gonzalez, In progress, 2024
Draft (preliminary) here, Central Bank of Chile Working Paper.
Presentation: JIE Special Conference on Quantitative Trade (UW-Madison), PUC Chile Alumni Conference (Santiago), Central Bank of Chile Seminar.
Abstract: Supply chain disruptions have become increasingly frequent, generating substantial uncertainty for companies that rely on sourcing inputs for production. We investigate how firms facing supply chain uncertainty adapt their sourcing strategies, by diversifying foreign suppliers, re-shoring, or selecting suppliers based on cost and risk considerations. To answer these questions, we develop a multi-country sourcing model inspired by Antras, Fort, and Tintelnot (2017), in which firms choose where to import from, accounting for international supply-chain disruptions. Our findings reveal that mean-preserving uncertainty introduces a positive option value associated with diversifying the set of suppliers. However, country-specific aggregate risk also features hedging motives, yielding ambiguous predictions on firms' sourcing decisions. Leveraging firm-level data from Chile, we use this structural model to estimate supply chain risk over time for major trade partners as well as fixed costs of sourcing. We assess the impact of the recent surge in trade risk following the Covid-19 pandemic, and we perform counterfactual exercises to evaluate how this affected firms' sourcing strategies. Our results indicate that the observed change in sourcing patterns correspond more to changes in expected costs rather than solely to increases in risk.
A Perturbational Approach for Approximating Heterogeneous-Agent Models
joint with Anmol Bhandari, David Evans & Mikhaïl Golosov, In progress, 2024
Draft here
Abstract: We develop a perturbational technique to approximate equilibria of a wide class of discrete-time dynamic stochastic general equilibrium heterogeneous-agent models with complex state spaces, including multi-dimensional distributions of endogenous variables. We show that approximating policy functions and stochastic processes that govern the distributional state to any order is equivalent to solving small systems of linear equations that characterize values of certain directional derivatives. We analytically derive the coefficients of these linear systems and show that they satisfy simple recursive relations making their numerical implementation quick and efficient. Compared to existing state-of-the-art techniques, our method is faster in constructing first-order approximations and extends to higher orders, capturing the effects of risk that are ignored by many current methods. We illustrate how to apply our method to a broad set of questions such as impacts of first- and second-moment shocks, welfare effect of macroeconomic risk and stabilization policies, endogenous household portfolio formation, and transition dynamics in heterogeneous agent general equilibrium settings.
Non-Keynesian stabilizers and wage-price spirals
joint with Francois Le Grand, and Xavier Ragot, In progress, 2024
Draft (preliminary) here
Abstract: When both prices and wages are subject to nominal frictions, a negative supply shock or a positive demand shock can trigger a wage-price spiral, as both nominal wages and prices adjust slowly. To analyze optimal policy in this environment, we consider a heterogeneous-agent model, with both wage and price stickiness. We derive joint optimal fiscal-monetary Ramsey policy, using a rich set of fiscal tools, for both supply and demand shocks. Studying various economies, we first find that time-varying labor tax is important to ensure price stability for demand shocks. Second, time-varying wage subsidy (to decrease the labor cost of firm) is the useful instrument for negative demand shocks. We call these policies a non-Keynesian stabilization policy because it does not operate directly through aggregate demand management. Finally, we show that the allocation is significantly different in the HA economy compared to the RA economy when public debt is a relevant tool.
Work in progress
When is aggregation enough? Aggregation and Projection with the Master Equation
In progress, 2024
Slides (preliminary) here
Abstract: I study how the Master Equation — developed in the Mean Field Games literature — can be used for economic models with heterogeneous agents and aggregate risk. Using projection, we can bypass part of the assumption of bounded-rationality as in Krusell, Smith (1998): households still consider few moments of the distribution when making expectations but their dynamics are now fully non-linear and consistent with equilibrium outcomes. We can obtain a global characterization of the value, agent policy, and aggregate dynamics in a standard HA models I plan to study richer models with portfolio choice when approximate aggregation may not hold and perturbation methods can be limited.
The Distributional Consequences of Climate Uncertainty
In progress, 2023
Abstract: Future climate damages are largely unknown, due to climate system uncertainty and tipping points, as well as our lack of knowledge of its economic impacts. Moreover, the effects of this uncertainty are also heterogeneous, interacting with differences in incomes and temperatures across countries. Through the lens of an Integrated Assessment Model with heterogeneous countries and aggregate risk, I study whether uncertainty exacerbates the distributive impacts of global warming. I show analytically that the Social Cost of Carbon and the optimal carbon tax depend on the covariance of ex-ante heterogeneity due to inequality across countries and ex-post heterogeneity due to risk. Solving such models with non-linear dynamics, path-dependence, heterogeneity, and aggregate risk requires using a novel numerical method I developed relying on the Stochastic Pontryagin Maximum Principle (SPMP). Carbon taxation provides an insurance mechanism against those climate risks – which can be substantial given the curvature of utility and damage functions.
Energy shocks and aggregate fluctuations
3rd year paper, 2022
Slides (preliminary) here
Abstract: How important is energy for economic fluctuations? The energy sector – e.g. oil and electricity – is complementary in industrial production processes. A decline in energy sources – due to a declining supply of fossil fuels (peak oil) – or political decisions to shrink greenhouse gas emissions – can have important implications for the macroeconomy. I analyze the contribution of shocks to the energy sector for business cycles fluctuations using a simple RBC model that features a high degree of complementarity and non-linearity in production. The first, I show that the expansion of energy supply was significant for output growth in the post-WWII period, and its decline can explain part of the slowdown in growth since the second oil shock. I show that energy shocks explain between 20 and 30$\%$ of output volatility. I study the impact of a steady increase in carbon taxation and show it could dramatically reduce economic activity depending on the renewable energy supply elasticity. I propose a multi-sector approach as an extension of this analysis.
Credit Cycles, Asset prices and Heterogeneous Firms
2nd year paper, 2020
Abstract: What is the influence of firm heterogeneity on credit cycles? Are recessions amplified by the collapse of large companies or rather by the deleveraging of a multitude of small firms? This paper explores the influence of micro-level heterogeneity of firms on the transmission of macroeconomic shocks such as financial crises. I propose a theoretical framework with heterogeneous firms, with a firm distribution can be skewed with a large tail as well as financial frictions such as collateral constraints and incomplete markets. I show that the interaction between these frictions create non-linear dynamics and amplification effects of aggregate risks. Simulating the model using continuous-time methods and finite-difference, I study the impact of different aggregate shocks, aggregate productivity, demand shocks, collateral quality and uncertainty shocks, and I explore the transmission channel to aggregate economic activity.
Pre PhD research projects
Wealth distribution over the business cycle, A mean-field game with common noise
Master thesis, 2018, Master in Mathematics at UPMC-Sorbonne, internship at Paris-Diderot University (LJLL), supervision: Yves Achdou. Long version (80 pages) here with a complete description of the mathematical framework, and Short version (25 pages) here.
Abstract: A key question in "Heterogeneous Agents" model as in Aiyagari-Bewley-Huggett, and reformulated as Mean Field Game (MFG) by Achdou, Han, Lasry, Lions, and Moll (2017), is the impact of aggregate shocks on macroeconomic dynamics or across the wealth distribution. With aggregate risk, this MFG with "common noise" is notoriously difficult to solve, due to the "curse of dimensionality". The common noise interacts with both decisions and distribution of agents, and standard methods either simplify the model or do perturbations around a stationary point. In contrast, I provide a new global method to preserve the full dimensionality and simulate the model with "large shocks". I develop a discretization procedure with a tree structure or (optimal) quantization to represent the trajectories of the common noise with a finite number of shocks and solve the MFG system using specific finite-differences methods for the two PDEs. We apply this method to the standard HA and HANK models, and I uncover a strong path-dependency of the model: such economies are typically non-Markovian. This has important implications for policy analysis when studying HA model with standard methods.
Fiscal policy in monetary union
Master thesis, 2016, Economic master EPP (Economics and Public Policy), supervision: Jean-Baptiste Michau (Ecole Polytechnique). Short version (20 pages) here and longer version (40 pages) here.
Abstract: What are the effects of fiscal policy in a monetary union? This article explores how government spending transmit across countries. I develop a New Keynesian model with two "large economies", two fiscal authorities and a central bank, to study optimal policy. I show that, with general equilibrium effects and heterogeneity, the clear separation between central bank stabilizing the union's inflation and fiscal policies stabilizing country-specific shocks does not hold. I identify the main transmission mechanisms of fiscal policy, with first a trade channel, through relative prices, and second a monetary response from the union central bank. The second channel largely dominates the first and spillovers of fiscal policy shocks crucially depend on the central bank mandate. This provides arguments supporting coordination between union central bank and fiscal authorities in the context of the European Monetary Union.