Bio
Welcome to my website! I am an Associate Professor in the Stanford Economics department.
My research combines economic theory and empirical methods to address macroeconomic questions. Among other topics, I have studied the role of credibility for monetary policy, the macroeconomic consequences of sovereign debt crises, the origins of financial dollarization in emerging markets, and the macroeconomic effects of financial shocks.
I am a faculty research associate at the National Bureau of Economic Analysis (NBER), where I co-organize the Summer Institute Workshop on Methods and Applications for Dynamic Equilibrium Models. I am also a research fellow at the Center for Economic Policy Research (CEPR), and a senior fellow at the Stanford Institute of Economic Policy Research (SIEPR).
Curriculum Vitae
Email: lbocola@stanford.edu
Phone: +1 (650)-7239-165
Office: 342 Landau Building, 579 Jane Stanford Way, Stanford, 94305
Working Papers
Monetary Policy without an Anchor
(with Alessandro Davis, Kasper Jørgensen, Rishabh Kirpalani)
Abstract (click to expand): Policymakers often cite the risk that inflation expectations might "de-anchor" as a key reason for responding forcefully to inflationary shocks. We develop a model to analyze this trade-off and to quantify the benefits of stable long-run inflation expectations. In our framework, households and firms are imperfectly informed about the central bank's objective and learn from its policy choices. Recognizing this interaction, the central bank raises interest rates more aggressively after adverse supply shocks and accepts short-run output costs to secure more stable inflation expectations. The strength of this reputation channel depends on how sensitive long-run inflation expectations are to surprises in interest rates. Using high-frequency identification, we estimate these elasticities for emerging and advanced economies and find large negative values for Brazil. We fit our model to these findings and use it to quantify how reputation building motives affect monetary policy decisions, and the role of central bank’s credibility in promoting macroeconomic stability.
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Slides
Bond Market Views of the Fed
(with Alessandro Davis, Kasper Jørgensen, Rishabh Kirpalani)
R&R at the Journal of Political Economy
Abstract (click to expand): This paper uses high frequency data to detect shifts in financial markets’ perception of the Federal Reserve stance on inflation. We construct daily revisions to expectations of future nominal interest rates and inflation that are priced into nominal and inflation-protected bonds, and find that the relation between these two variables---positive and stable for over twenty years---has weakened substantially over the 2020-2022 period. In the context of canonical monetary reaction functions considered in the literature, these results are indicative of a monetary authority that places less weight on inflation stabilization. We augment a standard New Keynesian model with regime shifts in the monetary policy rule, calibrate it to match our findings, and use it as a laboratory to understand the drivers of U.S. inflation post 2020. We find that the shift in the monetary policy stance accounts for half of the observed increase in inflation.
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The Macroeconomics of Trade Credit
(with Gideon Bornstein)
R&R at the American Economic Review
Abstract (click to expand): In most countries, suppliers of intermediate goods and services are also the main providers of short-term financing to firms. This paper studies the macroeconomic implications of these financial links. In our model, trade credit is the outcome of a long-term contract between firms linked in the production process, and it is sustained in equilibrium by reputation forces as customers lose the relationship with their suppliers in case of a default. These financial links give rise to a credit multiplier: suppliers can enforce repayment of these IOUs, and they can discount these bills with banks to obtain liquidity. This process can either dampen or amplify the output effects of financial shocks, depending on the borrowing capacity of suppliers. Using Italian data, we find that the credit multiplier is sizable and show that trade credit substantially amplified the output costs of the Great Recession.
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Slides
Sovereign Default Risk and Firm Heterogeneity
(with Cristina Arellano, Yan Bai)
Accepted at the Journal of the European Economic Association
Abstract (click to expand): This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. An increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. The resulting fall in credit supply impacts firms directly, as they need to borrow at higher interest rates, and indirectly through general equilibrium effects on the price of inputs and other goods. Importantly, firms are not equally affected by these developments: those that have greater financing needs and that borrow from banks that hold more government debt are mostly affected by the change in borrowing rates, while firms that do not borrow are only impacted indirectly. We show that these direct and indirect effects can be recovered using a firm-level regression, which we estimate using Italian data. We calibrate our model to match the measured firm-level elasticities and find that heightened sovereign risk was responsible for one-third of the observed output decline during the Italian debt crisis.
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Slides
Publications
Imperfect Risk Sharing and the Business Cycle
(with David Berger, Alessandro Dovis)
Quarterly Journal of Economics, Volume 138, Issue 3, August 2023, pp. 1765-1815
Abstract (click to expand): This article studies the macroeconomic implications of imperfect risk sharing implied by a class of New Keynesian models with heterogeneous agents. The models in this class can be equivalently represented as a representative-agent economy with wedges. These wedges are functions of households' consumption shares and relative wages, and they identify the key cross-sectional moments that govern the impact of households' heterogeneity on aggregate variables. We measure the wedges using U.S. household-level data and combine them with a representative-agent economy to perform counterfactuals. We find that deviations from perfect risk sharing implied by this class of models account for only 7% of output volatility on average but can have sizable output effects when nominal interest rates reach their lower bound.
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Data and codes
Risk Sharing Externalities
(with Guido Lorenzoni)
Journal of Political Economy, Volume 131, Issue 3, March 2023, pp. 595-632
Abstract (click to expand): Financial crises typically occur because firms and financial institutions are highly exposed to aggregate shocks. We propose a theory to explain these exposures. We study a model where entrepreneurs can issue state-contingent claims to consumers. Even though entrepreneurs can use these instruments to hedge negative shocks, they do not necessarily do so because insuring against these shocks is expensive, as consumers are also harmed by them. This effect is self-reinforcing because riskier balance sheets for entrepreneurs imply higher income volatility for the consumers, making insurance more costly in equilibrium. We show that this feedback is quantitatively important and leads to inefficiently high risk exposure for entrepreneurs.
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Codes
Financial Crises, Dollarization and Lending of Last Resort in Open Economies
(with Guido Lorenzoni)
American Economic Review, 110, August 2020, pp. 2524-2557
Abstract (click to expand): Foreign currency debt is considered a source of financial instability in emerging markets. We propose a theory in which liability dollarization arises from an insurance motive of domestic savers. Since financial crises are associated to depreciations, savers ask for a risk premium when saving in local currency. This force makes domestic currency debt expensive, and incentivizes borrowers to issue foreign currency debt. Providing ex post support to borrowers can alleviate the effect of the crisis on savers' income, lowering their demand for insurance, and, surprisingly, it can reduce ex ante incentives to borrow in foreign currency.
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Online Appendix
Data and codes
Exchange Rate Policies at the Zero Lower Bound
(with Manuel Amador, Javier Bianchi, Fabrizio Perri)
Review of Economic Studies, 87, July 2020, 1605-1645
Abstract (click to expand): We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.
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Data and codes
Self-Fulfilling Debt Crises: A Quantitative Analysis
(with Alessandro Dovis)
American Economic Review, 109, December 2019, pp. 4343-4377
Abstract (click to expand): This paper investigates the role of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk-averse lenders, and self-fulfilling crises à la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by both fundamental and nonfundamental risk. These two sources of risk have contrasting implications for the maturity structure of debt chosen by the government. Therefore, they can be indirectly inferred by tracking the evolution of debt maturity. We fit the model to Italian data and find that nonfundamental risk played a limited role during the 2008-2012 crisis.
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Online Appendix
Data and codes
Quantitative Sovereign Default Models and the European Debt Crisis
(with Gideon Bornstein, Alessandro Dovis)
Journal of International Economics, 118, May 2019, pp 20-30
Abstract (click to expand): A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt—rather than that of external debt—allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.
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Data and codes
Assessing DSGE Model Nonlinearities
(with Boragan Aruoba, Frank Schorfheide)
Journal of Economic Dynamics and Control, 83, October 2017, pp 34-54
Abstract (click to expand): We develop a new class of time series models to identify nonlinearities in the data and to evaluate DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage and price adjustment costs and use predictive checks to assess its ability to account for these nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage and price rigidities, these do not spill over to output growth or the interest rate.
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Data and codes
Reverse Speculative Attacks
(with Manuel Amador, Javier Bianchi, Fabrizio Perri)
Journal of Economic Dynamics and Control, 83, November 2016, pp 125-137
Abstract (click to expand): In January 2015, in the face of sustained capital in ows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple numerical framework that helps to better understand the timing of this episode, which we label a “reverse speculative attack”. We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses, can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.
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Data and codes
The Pass-Through of Sovereign Risk
Journal of Political Economy, 124, August 2016, pp 879-926
Abstract (click to expand): This paper examines the macroeconomic implications of sovereign risk in a model in which banks hold domestic government debt. News of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their resources to finance firms (liquidity channel). Second, it generates a precautionary motive to deleverage (risk channel). I estimate the model using Italian data, finding that sovereign risk was recessionary and that the risk channel was sizable. I also use the model to measure the effects of subsidized long-term loans to banks. Precautionary motives at the height of the crisis imply that bank lending to firms responds little to these interventions.
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Online Appendix
Data and codes
The Region
Trade and Business-Cycle Comovement: Evidence from the EU
Rivista di Politica Economica, November-December 2006
Abstract (click to expand): This paper studies empirically the determinants of business cycle co- movement using a panel of European countries (1972-2004). We find that both policy convergence (in particular fiscal policy) and bilateral trade intensity are robust determinants of real co-movement in Europe, this confirming the seminal study by Frankel and Rose (1998), and more recent finding by Bergman (2004) and Darvas, Rose and Svapary (2005). Moreover ,once controlling for policy convergence, the effect of bilateral trade on business cycle co-movement weakens by a factor of 36%-33%. This finding is interpreted as being evidence in favour of the recent claim by Gruben, Koo and Millis (2002) that Frankel and Rose econometric procedure suffers from omitted variables bias and endogeneity in the set of instruments.
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Teaching
Econ 212: Macroeconomics III
First-year Phd class in macroeconomics (co-taught with Patrick Kehoe)
2025 Syllabus
Econ 271: Intermediate Econometrics
First-year Phd class in econometrics (co-taught with Jann Spiess)
2025 Syllabus
Econ 268: International Finance and Exchange Rates
Second-year Phd class in open economy macroeconomics (co-taught with Matteo Maggiori)
2025 Syllabus
Econ 165: International Finance
Undergraduate class in International Finance
2022 Syllabus
