Academic seminar "Optimal Haircuts" by Nicolas Aragon

10/8/2020 at 5:00 PM ISST



Kyiv School of Economics invites to join an academic seminar by Nicolas Aragon "Optimal Haircuts". It will be held on October 8 at 17:00 (Kyiv time). 

About the speaker. Nicolas Aragon is a professor at Kyiv School of Economics and a researcher at the National Bank of Ukraine. He received his Ph.D  in Economics from the European University Institute. His fields of interest are Macroeconomics, Finance, Experimental Economics. 

Abstract. Aggregate haircuts to all debt in an economy have been implemented after large devaluations that induce a currency mismatch, or after  large recessions. This paper studies the desirability of this policy in a simple model of heterogeneous firms and households.  In the model, households finance firm's working capital, and  credit constrained firms are heterogeneous in their productivity and hence  debt levels. After an unexpected aggregate shock to the interest rate, the least productive firms go bankrupt. This directly decreases the wage income of the households, and indirectly decreases their income from the defaulted loans to firms. First best policy is not necessarily implemented by debt renegotiation after the shock, due to banks not taking into account the externality of bankruptcy on wages. Even in the absence of transaction costs, there is a haircut on all deposits that is superior in terms of welfare to the renegotiation outcome, and under some transaction costs may be first best. The level of the haircut depends on the distribution of firms and the level of wage and loan income.  A quantitative version of the model is calibrated  to the Argentinian aggregate haircut after the devaluation episode of 2001, and the transitional dynamics are studied. The model provides insights for countries attempting to escape a monetary union or a currency peg.

This seminar is enabled by the financial support from Sweden.

Registration for this event is closed.

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