Banks and the Macroeconomic Transmission of Interest-Rate Risk (Job Market Paper)
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.
Publications
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)
Optimal Fiscal Policy in Collateral-Constraint Models (Link to Paper)
I study optimal government spending in a canonical, small-open-economy model where a collateral constraint gives rise to overborrowing. I show quantitatively that excess procyclicality - a pervasive feature of emerging markets - makes the economy more vulnerable to sudden stops. In normal times, pro-cyclical spending encourages borrowing and magnifies the inefficiency; during a sudden stop, it depresses collateral values and exacerbates deleveraging pressures on households. I characterize the optimal time-consistent policy and show that it would significantly reduce both the likelihood and severity of a sudden stop.