Fiscal Policy Design in Collateral-Constraint Economies: the Role of Commitment (Link to Paper) Accepted at Journal of International Economics
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.
Sovereign Debt, Domestic Banks and the Provision of Public Liquidity, with Diego Perez (Link to Paper) Reject & Resubmit at Review of Economic Studies
This paper develops a model to study how a default can affect the domestic economy and the government’s ability to provide liquidity. Banks that do not have good investment
opportunities invest in public debt. After a default the government’s ability to credibly issue debt is undermined. A scarcer supply of public debt makes banks substitute
away from government securities to investments in their less productive projects. A quantitative analysis of the model for Argentina can generate a deep and persistent
fall in output post-default, which induces repayment incentives to sustain significant levels of external public debt. We provide empirical support for the model’s mechanism
and use the model to analyze different policies that regulate banks’ holdings of public debt.
Work in Progress
Market Efficiency and Welfare in the Interbank Market, with Thomar van Hees