Academic

Ongoing

• Financial Frictions and Firm Growth

  with Tobias Renkin and Filip Rozsypal

Working papers

• Wage Flexibility and Household Heterogeneity in a Small Open Economy

  Master's Thesis (2022)

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  Structural reforms that increase labour market flexibility have conventionally been believed to facilitate employment stability. These stability benefits depend on the responsiveness of employment to labour cost adjustments. In a standard New Keynesian model, this responsiveness depends on aggregate demand the endogenous reaction of monetary policy which is muted in a monetary union. I revisit the effect in a small open-economy HANK model, where demand is affected directly by changes in the real wage. I first simulate a temporary payroll tax cut and compare responses for a Taylor rule and a monetary union and show that employment is responsive to labour cost reductions under both monetary regimes. I then simulate a foreign interest rate and a foreign demand shock and assess welfare losses at varying levels of wage flexibility. I find that: (i) wage flexibility increases the responsiveness of employment in the face of adverse foreign shocks; (ii) in a monetary union, wage flexibility results in substantial relative welfare losses, especially for poorer households, driven by income and multiplier effects, while for a Taylor rule, welfare effects are smaller and co-determined by the monetary policy response; (iii) under both monetary regimes, a one for one increase of price and wage flexibility has only minimal welfare effects, while a decrease of flexibility results in relative gains for an interest rate shock and relative losses for a foreign demand shock.

Applied and policy

Published articles and chapters

• Sovereign Debt and Fiscal Integration in the European Union

  with Zsolt Darvas and Jeromin Zettelmeyer, Journal of Economic Perspectives (forthcoming)

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  This paper examines sovereign debt risks in the European Union, which has centralized monetary policy within the euro area, while fiscal policies remain national. Institutional reforms, including common banking supervision, the European Stability Mechanism, the European Central Bank’s market-stabilisation instruments, and a new set of fiscal rules, have mitigated vulnerabilities arising from the interdependence between banks and sovereigns. Stochastic debt sustainability analysis suggests that debt remains sustainable in most EU countries, although substantial fiscal adjustments will be required in some cases. Fiscal reaction function estimates, however, reveal a weakening policy response to rising debt, signalling increased medium-term risks. The paper argues that further adaptation of fiscal rules is needed to encourage investment and provide greater flexibility for low-risk countries. Expanding the pool of common EU safe assets could also help break the bank-sovereign doom-loop, attract foreign investors, and strengthen fiscal sustainability.
• How demographic change will hit debt sustainability in European Union countries

  with Zsolt Darvas and Jeromin Zettelmeyer (2024), Journal of Policy Modeling

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  Population ageing is increasingly straining the fiscal stability of European Union countries by raising public expenditures and slowing economic growth, which worsens debt-to-GDP ratios. To manage these pressures and comply with EU fiscal rules, member states must maintain strong structural primary balances—the difference between non-cyclical revenues and non-interest spending. The EU requires nations to address the fiscal impacts of ageing from 2025 over a ten-year adjustment period, with the most significant effects occurring in the first four to seven years. After this period, most countries won’t need to further increase their structural primary balances. However, except for Bulgaria, Croatia, Finland, France, Italy, Latvia, and Sweden, other EU nations must continue fiscal adjustments in non-ageing areas. This may involve reallocating spending or raising taxes, presenting tough policy choices. Additionally, demographic risks could increase required primary balances by over one percentage point of GDP, while policies like boosting immigration, fertility, labor participation, and productivity could alleviate pressures by about half a point. Effective implementation of EU recommendations is crucial for addressing these demographic challenges.
• Distributional Effects of Climate Policy

  with Juan Mejino López and Georg Zachman, in Handbook on the Welfare State and Climate Change (forthcoming)

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  The climate transition can have distributional impacts with social implications leading to a adverse views towards climate policies. These impacts may however differ across climate policies, as well as socio-economic characteristics like gender, income-groups or regions, and they thus constitute a subject of high interest for both academics and policy makers. This chapter provides an analytical framework based on Claeys et al (2024) to assess how climate policies affect income and wealth distribution across different chanels within a country, across different sectors and socio-economic groups. It also assesses the impact between countries in relation to their climate exposure, fossil fuels reliance or investment needs. The paper also relates the analysis to the literature and contrasts different existing research. It finally concludes with specific policy considerations.
• Export competition between China and Latin America and the Caribbean in the United States market

  with Raquel Artecona and Daniel E. Perrotti (2024), World Economy

  Working Paper Link Show abstract

  We investigate export competition between China and Latin America and the Caribbean (LAC) in the United States market between 2002 and 2022. Using a sample of 33 exporters and 10-digit Harmonized Tariff Schedule (HS) level trade data, we estimate a structural gravity model using an instrumental variable constructed from Chinese exports to eight other industrialized nations. We use a first-order Taylor-series expansion à la Baier and Bergstrand (2009a) to approximate the multilateral price terms pointed out by Anderson and Van Wincoop (2003). The results show that the impact of Chinese exports on United States imports from LAC is negative and statistically significant across several model specifications, levels of aggregation, and sectors. A percentage increase in imports from China decreased imports from LAC by ca. 0.75 percent. The displacement effect is ca. 0.32 for manufacturing products, 1.01 for resourcebased products, 1.33 when estimated only for South America, 0.25 for the Caribbean, and not significant for Central America.
• Debt Sustainability Analysis in Reformed EU Fiscal Rules: The Effect of Fiscal Consolidation on Growth and Public Debt Ratios

  with Philipp Heimberger, Bernhard Schütz, Sebastian Gechert, Dario Guarascio and Francesco Zezza (2024), Intereconomics

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  Debt Sustainability Analysis (DSA) relies on macroeconomic and fiscal policy assumptions; it plays an essential role in providing an anchor for bilateral negotiations and surveillance in the context of reformed EU fiscal rules. While the European Commission assumes a constant short-run fiscal multiplier of 0.75, the literature highlights that there is no single fiscal multiplier for all countries and all times. Furthermore, the European Commission’s DSA framework assumes a fast dissipation of the output effect of fiscal adjustment, and that fiscal consolidation efforts by trading partners do not spill over into domestic economic activity. This article presents DSA simulations that relax the official assumptions by focusing on the four largest euro area economies: Germany, France, Italy and Spain. The results suggest that the debt sustainability framework in reformed EU fiscal rules is sensitive to changes in assumptions and may underestimate the negative growth effects of fiscal adjustment. Hence, public debt ratios may turn out higher than expected.
• The longer-term fiscal challenges facing the European Union

  with Jeromin Zettelmeyer, Gregory Claeys, Zsolt Darvas, and Stavros Zenios (2024), in A yearbook on the Euro 2024

  (earlier version co-authored with Stavros Zenios presented at the 2023 Informal ECOFIN)

  PDF Working Paper Show abstract

  The pandemic and the fallout from Russia's invasion of Ukraine have intensified longer-term fiscal pressures in the European Union, stemming from increased debt, anticipated higher real interest rates, and heightened public investment demands. This Policy Brief provides quantitative assessments and policy implications. Firstly, most EU countries will require long-term increases in primary fiscal balances, ranging from 0.5 percent to 1.5 percent of GDP, though adjustments vary due to existing fiscal space disparities. Secondly, while significant, the additional fiscal adjustment appears manageable, with some countries needing to raise primary balances by over 2 percent of GDP. Thirdly, future real interest rate paths are uncertain, having risen by approximately 2 percentage points post-pandemic but remaining relatively low at around 1 percent in real terms. Policymakers should not presume a decline in rates. Lastly, increased public spending demands for defense and climate initiatives, exceeding 1 percent of GDP annually, aren't yet factored into fiscal baselines and will compound existing adjustment efforts. Gradual fiscal adjustment, commencing when cyclical conditions permit, is crucial to avoid hampering economic growth.
• Tensiones comerciales entre China y Estados Unidos: ¿Una oportunidad para América Latina y el Caribe en el mercado estadounidense?

  with Raquel Artecona and Daniel E. Perrotti (2024), in Retos y oportunidades de América Latina y el Caribe en el comercio mundial pospandemia

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  We analyse the impact of the China-United States trade tensions on the displacement of exports from Latin America and the Caribbean by China in the United States market using an augmented gravity model. For products directly involved in the trade dispute, a percentage increase in Chinese exports, on average, led to a decrease of Latin American and Caribbean exports of about 0.24 to 0.42 percent before, and 0.21 and 0.25 percent after the introduction of tariffs. This reduction is statistically significant even after controlling for sector, country, and time specific trends. Reductions in the displacement of products not involved in the trade tensions are not robust to the inclusion of such trends. The results suggest that trade tensions partly offset the displacment of Latin American and Caribbean exports.

Policy briefs and analyses

• What will it take to stabilise debt in advanced countries?

  with Zsolt Darvas, Gonzalo Huertas, and Jeromin Zettelmeyer, Bruegel Working Paper (forthcoming)
• What Germany’s medium-term fiscal plan means for Europe

  with Zsolt Darvas and Jeromin Zettelmeyer (2025), Bruegel Policy Brief

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  Germany's 2025 fiscal plan illustrates the inherent tension between financing public investment and adhering to the EU's fiscal rules. The plan's proposed reconciliation relies on overly optimistic macroeconomic assumptions and significant, backloaded fiscal adjustments. We find that under realistic economic projections, Germany’s debt-to-GDP ratio will continue to rise, failing to comply with the EU fiscal framework’s adjustment path. While German debt sustainability is not threatened, the European Commission’s endorsement of the plan’s optimistic assumptions establishes a precedent that undermines the framework's credibility. This may incentivize other member states to adopt similarly unsound assumptions. We conclude that the EU fiscal rules require further reform to allow low risk countries to undertake public investment, thereby aligning the framework with both debt sustainability and macroeconomic needs.
• The implications of the European Union’s new fiscal rules

  with Zsolt Darvas and Jeromin Zettelmeyer (2024), Bruegel Working Paper

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  The European Union's new fiscal framework aims to enforce budget deficit and public debt limits through country-specific debt sustainability analyses (DSA) and a public expenditure indicator as the annual fiscal policy target. This approach is more effective than simple numerical rules, focusing on debt path evolution and avoiding pro-cyclical fiscal policies. However, numerical safeguards in the new framework may undermine DSA-based requirements and hinder public investment. More, ambiguities in the new rules and the excessive deficit procedure (EDP) could impede successful implementation. We compar eimplications of the old and te new rules and make several recommendations for successful implementation, including aligning EDP adjustments with DSA, quantifying investment impacts, revising DSA methodology, and establishing an EU facility for green public investments if needed.
• Incorporating the impact of social investments and reforms in the EU's new fiscal framework

  with Zsolt Darvas and Jeromin Zettelmeyer (2024), Bruegel Working Paper

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  The EU's new fiscal framework extends the fiscal adjustment period to incentivize public investment and reforms. However, there's no agreed methodology to gauge their impact on fiscal adjustments. This paper assesses the framework's "investment friendliness" and proposes a methodology to quantify the impact of investments and reforms on debt sustainability. It suggests reevaluating existing methodologies for projections and illustrates potential impacts through social investment measures. This analysis emphasizes the necessity of a standardized approach to evaluate the effects of investments and reforms within the EU's fiscal framework.
• The EU needs a methodology for including reform impacts in fiscal trajectories

  with Zsolt Darvas and Jeromin Zettelmeyer (2024), Bruegel First Glance

  Link
• Internationale Staatsverschuldung, Schuldenrestrukturierungen und mögliche Handlungsoptionen für das BMZ

  with Jeromin Zettelmeyer (2023), Policy Paper for the German Ministry of Economic Cooperation and Development

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• A quantitative evaluation of the European Commission´s fiscal governance proposal

  with Zsolt Darvas and Jeromin Zettelmeyer (2023), Bruegel Working Paper

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  The EU's new fiscal framework (proposed April 2023) uses debt sustainability analysis (DSA), the 3% deficit limit, and safeguards to determine fiscal adjustment needs. Disagreement exists over a DSA-based approach vs. relying on simple rules. We replicated the DSA methodology to evaluate the proposal, finding ambitious adjustment requirements (averaging over 2% of GDP) exceeding current plans for most high-debt countries. While DSA generally drives these requirements, notable exceptions exist. France's 'debt safeguard' mandates much greater adjustment than the DSA. Extending the adjustment period (possible under the framework) would make safeguards binding for several countries. Additionally, the deficit reduction rule could become binding after output shocks. The Commission's DSA methodology, while reasonable, warrants review by an independent group. We endorse the proposal with modifications: clarify ambiguities, remove/modify safeguards, reform the excessive deficit procedure to prevent procyclicality, and establish a process for reviewing the DSA methodology.
• European Union countries’ recovery and resilience plans

  with Zsolt Darvas et al. (2023), Bruegel Datasets

  Link
• What will it cost the European Union to pay its economic recovery debt?

  with Gregory Claeys and Conor McCaffrey (2023), Bruegel Analysis

  Link
• An estimate of the European Union's long-term borrowing cost bill

  with Gregory Claeys and Conor McCaffrey (2023), Briefing for the Committee on Budgets (BUDG), European Parliament

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  The European Union's budget must cover the costs of interest and principal payments on debt issued to fund the non-repayable portion of the post-pandemic recovery program. Understanding the evolution of these costs until full reimbursement in 2058 is crucial. Median estimates suggest yearly interest costs borne by the EU budget could peak at €10.8 billion (0.05% of EU GDP) in 2030 before gradually decreasing. Total costs over the program's lifespan could reach €222 billion (0.6% of average EU GDP), potentially reduced by €25 billion if the EU spread normalizes to early 2022 levels. Factoring in debt repayment, total annual financial needs may hit €25 billion in 2030, declining to €14 billion by program end. The EU's proposed 'Own Resources' package could cover these costs if accurate and accepted by member states. However, substantial uncertainty surrounds interest rates over the program's duration, emphasizing the need for caution.
• The rising cost of European Union borrowing and what to do about it

  with Gregory Claeys and Conor McCaffrey (2023), Briefing for the Committee on Budgets (BUDG), European Parliament

  PDF Working Paper Show abstract

  The European Commission's debt issuance for the EU has surged, with approximately €400 billion outstanding as of May 2023, mostly incurred since 2020. Continued borrowing is anticipated until 2026 to fund NextGenerationEU and support for Ukraine. While initial borrowing benefited from historically low interest rates, rates rose notably in 2022. Factors contributing to this rise include broader eurozone interest rate increases and widening yield spreads compared to major European issuers like France and Germany. To address this, the Commission should enhance market infrastructure and refine its issuance strategy. However, institutional developments and progress on new own resources are also crucial to optimize EU borrowing benefits. A significant portion of borrowing is allocated to non-repayable support, such as Recovery and Resilience Fund grants, adding pressure on the EU budget due to higher-than-expected interest costs. Consequently, the EU must promptly review its budget and financial framework to accommodate these increased costs and mitigate impacts on important EU programs already strained by inflation.
• First lessons from the Recovery and Resilience Facility lessons for the EU economic governance framework

  with Zsolt Darvas (2023), Economic Governance Support Unit (EGOV) Study, European Parliament

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  We document the poor track record of implementation of the European Semester country-specific recommendations and discusses the novelties the Recovery and Resilience Facility (RRF) could bring to EU economic governance. While it is too early to evaluate the success of the RRF, this study draws out lessons for the future of the EU economic governance framework from certain aspects of the RRF design and the European Commission’s evaluation of the national recovery and resilience plans.
• Does inflation hit the poor hardest everywhere?

  with Gregory Claeys and Conor McCaffrey (2023), Bruegel Analysis

  Link
• The EU Recovery and Resilience Facility falls short against performance-based funding standards

  with Zsolt Darvas and Jeromin Zettelmeyer (2023), Bruegel Analysis

  Link
• Is Europe failing on import diversification?

  with Georg Zachman (2023), Bruegel Analysis

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• Inflation inequality in the European Union and its drivers

  with Gregory Claeys, Lionel Guetta-Jeanrenaud, and Conor McCaffrey (2022), Bruegel Datasets

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