Work in progress

Financial intermediation, inequality and sudden stops

This study offers a simplified model of a small open economy with financial frictions and agent heterogeneity to explain how inequality and financial frictions can worsen economic shocks in developing countries. The model shows the interactions between collateral limits, interest rates, and the exchange rate under normal and crisis conditions. When a shock limits foreign credit for financial intermediaries, domestic interest rates rise, and the exchange rate falls. This causes low consumption among low- and middle-income households, triggering a debt-deflation cycle. The model differs from standard ones in showing how financial shocks affect the sector's balance sheet, impacting the debt-heavy lower-middle income group, and how rising interest rates increase borrowing capacity for the wealthy, worsening income inequality and amplifying shocks. 

Income Inequality and the Current Account

with Michael Kumhof, Romain Ranciere and Pablo Winant

Current account regressions show that when top income shares are added to the comprehensive set ofconventional explanatory variables used by the IMF, they predict significantly larger current accountdeficits in a cross-section of advanced economies, but with important outliers among countries that havepursued export-led rather than finance-led growth strategies. To study this mechanism, we develop aDSGE model where the income share of top earners increases at the expense of bottom earners. Due topreferences for wealth, top earners have a much higher marginal propensity to save than bottom earners,as they do in the data. We find that, when the redistributive shock has a large positive effect on assetvalues, and if domestic financial markets are large, the result will be a sizeable current account deficit.On the other hand, when the redistributive shock mostly affects relative labor incomes, and if domesticfinancial markets are small, the result will be a current account surplus.

Income inequality and the capital share: A panel study

with Oğuzhan Akgün

This study examines the relationship between income inequality and the capital's share of national income, emphasizing its heterogeneous nature over time and across countries. Our analysis is based on a fundamental accounting identity that links personal income distribution to the composition of total national income. We estimate the parameters connecting capital share and income inequality using data from the last three decades across 41 economies. The findings reveal that the impact of capital share on income inequality varies significantly by country, over time, and depending on the capital share definition used. Adjusting factor income definitions to exclude non-resident income types or considering social insurance effects leads to substantial changes in parameter estimates. Our refined factor share definitions and advanced estimation techniques that account for unobserved heterogeneity enhance precision compared to previous studies. 

Empirical findings are summarized as follows:

1. On average, a one percentage point increase in the capital share raises the top 5% income share by 0.24 to 0.32 percentage points.

2. Country-specific estimates show significant heterogeneity and closely match available marginal effect data.

3. The top earners' share of total capital income has remained steady over time, with temporal heterogeneity driven by their share of total labor income.

Working Papers

How responsive are housing markets in the OECD? National level estimates, 2019

with Maria Chiara Cavalleri, Boris Cournède

The trend rise of house prices in many OECD countries suggests weakness in the adjustment of supplyto demand. This paper estimates long-term elasticities of housing supply to prices in OECD countriesbefore exploring their drivers with a focus on policies. It finds a significant association between weakersupply responsiveness and a proxy measure for more restrictive land-use regulation. Besides, tighter rentcontrols are linked with lower supply elasticities. In turn, weak supply responsiveness implies that houseprices rise more following stronger demand. The sensitivity of house prices to household income is alsohigher in countries that provide larger amounts of tax relief for homeowners