Impact of higher capital buffers on banks’ lending and risk-taking in the short- and medium-term: evidence from the euro area experiments., with Aurea Ponte Marques and Giuseppe Cappelletti, Journal of Financial Stability (2024): 72: 101250. (Link to Submitted Paper) (Link to Journal)
Banks and the Macroeconomic Transmission of Interest-Rate Risk (Job Market Paper)
Young Economist Prize 2024, Qatar Centre for Global Banking & Finance at King’s College London
Finalist, Young Economist Prize 2024, European Central Bank
I study the role of financial intermediaries in the transmission of interest-rate risk. I develop a quantitative model where banks can invest in assets of different durations and choose optimally their exposure to interest-rate fluctuations. I embed this portfolio problem in a heterogeneous-banks framework with financial frictions and endogenous default. The model predicts that in periods of loose monetary policy banks face weaker financial constraints. As a result, they become more tolerant of interest-rate risk and invest more extensively in long-duration assets. However, when the economy undergoes a sudden monetary tightening, this portfolio shift amplifies contractions in asset prices, credit, and output. I validate the model by showing that it can reproduce aggregate and cross-sectional patterns related to banks’ maturity mismatches, the level of the interest rate and leverage. A quantitative application to the 2022 monetary tightening shows that a lengthening of duration in periods of low interest rates gives rise to significant financial amplification. A liquidity requirement that restricts banks’ investment in long-term assets makes the economy less vulnerable to sudden interest-rate raises.
Fiscal Policy Design in Collateral-Constraint Economies: the Role of Commitment (Link to Paper)
I study the optimal design of fiscal policy, with and without commitment, in collateral-constraint models where the households’ borrowing capacity is linked to the economy’s real exchange rate. When the collateral constraint is binding, increasing public spending raises the real exchange rate and stabilizes private consumption. However, by making potential crises less costly, higher spending also makes borrowing more attractive. I show that the Ramsey-optimal policy entails a commitment to restrict fiscal stimulus during crisis periods, aimed at deterring excessive debt accumulation. In a quantitative application to Argentina, I find that significant fiscal expansions are not optimal due to the borrowing inefficiency, despite the potential for considerable ex-post gains from stabilizing the real exchange rate.