Work in Progress

Optimal Macroprudential Policy and Asset Price Bubbles, IMF Working Paper 19/184, joint with N. Biljanovska and A. Vardoulakis - submitted

We study the interplay between firms' indebtedness and bubbly valuations in their stock market price. An asset bubble relaxes borrowing constraints and increases borrowing by credit-constrained firms. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding borrowing constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the externalities from a deflating bubble when constraints bind. 

• presentations in 2020/21: AEA 2021 Annual Meetings, ECB-RFS Macro-Finance Conference,  2021 WFA Meetings 

Leakages from macroprudential regulations: The case of household-specific tools and corporate credit, IMF Working Paper 21/113, joint with A. Bhargava and P. Xie 

Sector-specific macroprudential regulations increase the riskiness of credit to other sectors. Using firm-level data this paper computed the measures of the riskiness of corporate credit allocation for 29 advanced and emerging economies. Consistently across these measures, the paper finds that during credit expansions an unexpected tightening of household-specific macroprudential tools is followed by a rise in riskier corporate lending. Quantitatively, such unexpected tightening during a period of rapid credit growth increases the riskiness of corporate credit by around 10 percent of the historical standard deviation. Cross-country analysis of bank-level lending also suggests that during credit expansions banks with higher exposure to residential mortgages experience much higher corporate loan growth compared to banks with smaller mortgage portfolios. These results support early policy interventions when credit vulnerabilities are still low, since sectoral leakages will be less important at this stage. Further evidence from bank lending standards surveys suggests that the leakage effects are stronger for larger firms compared to SMEs, consistent with recent evidence on the use of personal real estate as loan collateral by small firms.

• Central Banking blog (28 June 2021): here

Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model, IMF Working Paper 23/236, joint with H. Chang, F. Grinberg, M. Miccoli and B. Tan

Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower deposits (disintermediation) and lending in the banking sector? This paper develops a model where households heterogeneous in wealth allocate between an illiquid asset and assets that can be used for payments: bank deposits, cash, and CBDC. CBDC is more efficient as a means of payment and has lower access cost than deposits. Deposits are offered by an imperfectly competitive banking sector which raises deposit interest rates after CBDC introduction to prevent substitution away from deposits to CBDC. We find that there are two opposing margins of impact on the level of aggregate deposits: (1) the intensive margin gain in deposits by richer households increasing their holdings of deposits because of higher interest rates, and (2) the extensive margin loss of deposits among poorer households who switch from deposits to the CBDC. The extensive margin loss in deposits is more likely to dominate (yielding a fall in aggregate deposits) when the mass of poorer households is large and when it is relatively costly to access bank accounts. This tends to be the case in developing and emerging market economies. However, even when the extensive margin loss of deposits dominates and there is disintermediation, the impact on lending is quantitatively small if banks have access to other forms of funding, such as wholesale or central bank financing.

Biases in survey inflation expectations: Evidence from the Euro Area, ECFIN Discussion Paper 170/2022, joint with J. Chen and V. Zdarek

This paper reveals new facts about inflation expectations in the euro area. First, individual inflation expectations overreact to individual news. Second, the cross-section average of individual inflation expectations underreacts to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation expectations to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the U.S. economy.