# Research & Work in progress

## Job Market Paper

**The Optimal Design of Climate Agreements**: Inequality, Trade and Incentives for Carbon Policy. In progress, 2024

Slides here

How can we design a climate agreement that implements the optimal climate policy? In the presence of inequality, trade, and policy constraints, the lack of climate cooperation and free-riding incentives are exacerbated. Through the lens of an Integrated Assessment Model (IAM) with heterogeneous countries and bilateral trade, I study the optimal taxation of fossil fuels and its implementation when countries can deviate from applying the optimal policy. First, I derive formulas for the Social Cost of Carbon (SCC) and second-best fossil fuel taxes and trade tariffs in the presence of inequalities, and general equilibrium effects through energy and good trade. When countries can exit climate agreements, the policy design with participation constraints faces a tradeoff between an intensive margin – a climate club with few countries but a carbon tax closer to the first best, and large emission reduction – and an extensive margin – accommodating a larger number of countries at a cost of lowering the carbon tax. I propose a method to handle the combinatorial policy design problem. I show that if gains from trade are not too small compared to the distortive effects of energy taxation, the second-best optimal policy can be implemented effectively with trade tariffs or carbon border adjustment mechanisms.

**The Inequality of Climate Change and Optimal Energy Policy**. In progress, 2024

Draft here

**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 effects through energy and good trade, and participation constraints if countries can exit climate agreements. 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 extensions with international trade, uncertainty, or participation constraints when countries can leave climate agreements.

**A Perturbational Approach for Approximating Heterogeneous-Agent Models**, joint with Pr. Anmol Bhandari, David Evans & Mikhaïl Golosov, In progress, 2023

**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.

**Supply chain disruptions and risk in international trade**, joint with Ignacia Cuevas and Gustávo Gonzalez. In progress, 2023.

**Abstract**: Supply chain disruptions are becoming increasingly frequent, generating uncertainty for firms that need to source inputs to produce. We aim to understand whether firms, faced with supply chain disruption risk, would diversify their sourcing from foreign countries, engage in re-shoring, or select suppliers based on cost or risk considerations. To answer this, and drawing inspiration from Antras, Fort, and Tintelnot (2017), we write a multi-country sourcing model considering firms’ self-selection into importing based on productivity, cost minimization, and trade disruptions that can alter the cost of importing. Our findings reveal that, even in the presence of aggregate or idiosyncratic uncertainty, a clear pecking order emerges, with larger firms self-selecting into importing from a more extensive set of suppliers. Despite the quantitative significance of marginal cost reduction as the primary driver of firms’ sourcing decisions, risk introduces a nuanced dimension. Specifically, firm-specific import risk introduces a positive option value associated with diversifying the set of suppliers. Meanwhile, country-specific aggregate uncertainty has an ambiguous impact since it affects the market demand, leading to a reduction in firms’ profits, as well as giving a positive option value. To empirically validate our model, we estimate supply chain disruption uncertainty and fixed costs of sourcing using firm-level data from Chile. Our analysis includes counterfactual scenarios to assess the impact of external shocks, such as the Covid-19 pandemic, on firms’ sourcing strategies. Through this research, we contribute to understanding how firms navigate supply chain uncertainties and make strategic sourcing decisions in the face of disruptions.

**Energy shocks and aggregate fluctuations**, 3rd year paper, 2021.

**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. We measure the contribution of shocks to the energy sector to business cycles using a simple RBC model that features a high degree of complementarity and non-linearity in production. The first result shows that the expansion in energy supply was significant for output growth in the post-WWII period, and its vanishing can explain part of the decline since the second oil shock. Several experiments are performed to test for the likelihood of energy-less output growth and the impact of a carbon tax. We propose a multisector approach as an extension of our analysis and provide some preliminary empirical facts.

**Credit Cycles, Asset prices and Heterogeneous Firms**, 2nd year paper

**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 – in size, productivity and assets – on the transmission of macroeconomic shocks such as financial crises. We propose a theoretical framework with heterogeneous firms that jointly analyzes firm dispersion, their power-law distribution as well as financial frictions such as collateral constraints and incomplete markets. We show that the interaction between these frictions create non-linear dynamics and further amplification effects of aggregate risks. Simulating the model using continuous-time methods and finite-difference, we consider different aggregate shocks, on aggregate productivity, aggregate demand, collateral quality and uncertainty shocks, and we explore which one has the largest impact on aggregate fluctuations. In a situation where the firm distribution is skewed with a large tail, we investigate if the granularity hypothesis of business cycles holds and show which type of firms suffer the most from recession episodes.

## Pre PhD research projects

**Wealth distribution over the business cycle, A mean-field game with common noise**

Master thesis, 2018, for the Master Mathematics at UPMC-Sorbonne (M2 – Mathematics of Modelling), in internship at Paris-Diderot University (LJLL), under the supervision of Yves Achdou. Long version (80 pages) here with a complete description of the mathematical framework, and Short version (25 pages) here. Test6

**Abstract** : The standard “Heterogeneous Agents” model – by Aiyagari-Bewley-Huggett – has recently been reformulated as a Mean Field Game (MFG) by Achdou, Han, Lasry, Lions, and Moll (2017). One key question in such model is to understand the transmission of aggregate shocks – on macroeconomic dynamics or the shape of the wealth distribution. With aggregate risk, this framework can thus be understood as a MFG with “common noise”. However, solving such model is notoriously difficult, due to the “curse of dimensionality” arising when common noise interact with both the behavior and the distribution of agents. Economists usually simplify the model with a finite set of moments of the measure (bounded-rationality à la Krusell-Smith) or using Projection and Perturbation methods (à la Reiter). In contrast, we use new methods to keep the full dimensionality and simulate the model using a discretization procedure for the common noise. Considering a tree structure or (optimal) quantization to represent the trajectories of the common noise with a finite number of shocks, we solve the MFG system using specific finite-differences methods for the two PDEs. We apply this method to the standard framework, and two extensions (i) with Endogenous Labor Supply (ii) One Asset HANK model and we provide intuitions for (iii) the two Assets H.A. model (à la Kaplan-Moll-Violante). We show that such method might be relevant to analyze the transmission of large shocks on the economy.

**Fiscal policy in monetary union**

Master thesis written in 2016, for the Economic master EPP (Economics and Public Policy), under the supervision of 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 the role of government spending, the optimal policy design and the spillovers of public spending shocks in an integrated union. I develop a two-countries New Keynesian model with “large economies”, update the conclusions at stake in “small open economy” models, and provide a general framework where countries differ on many dimensions – home-bias, agents preferences, price rigidities and labor supply. I first show that interaction effects and structural heterogeneity matter for optimal policy: the clear separation between central bank stabilizing the union and fiscal policies stabilizing country-specific shocks does not hold in this setting. Second, 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 in this framework 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.