Publications:
QE: Implications for Bank Risk-Taking, Profitability, and Systemic Risk, (with Supriya Kapoor), International Journal of Central Banking, forthcoming.
Abstract: In the aftermath of the sub-prime mortgage bubble, the Federal Reserve implemented large scale asset purchase (LSAP) programmes that aimed to increase bank liquidity and lending. The excess liquidity created by quantitative easing (QE), in turn, may have stimulated bank risk-taking in search of higher profits. Using comprehensive data on balance sheets, risk measures, and daily market returns in the U.S., we investigate the link between QE, bank risk-taking, profitability, and systemic risk. We find heterogeneous effects across different rounds of QE. In particular, during the third round of QE, banks that were more exposed to unconventional monetary policy through mortgage-backed securities (MBS) purchases increased their risk-taking behavior and profitability. However, these banks also reduced their contribution to systemic risk, indicating that the implementation of QE had an overall stabilizing effect on the banking sector. These results highlight the different distributional effects of QE.
Relative Finance Wages and Inequality: A Role for Intangibles?, Journal of International Financial Markets, Institutions and Money, forthcoming.
Abstract: We investigate the role of intangible capital in the growth of relative finance wages using i) a production framework entailing multi-level nesting and ii) reduced-form analysis. We find that the degree and effects of complementarity between skilled labor and intangible capital are much more pronounced in finance than in the rest of the market economy. The stronger positive effects of such complementarity on finance skill premia are reinforced by relatively stronger unskilled labor substitution possibilities and technical change in the sector. Despite accounting for under a tenth of overall economic activity, finance offsets up to almost a third of declines in skilled-unskilled wage disparities nationally. We thereby find that finance contributes inordinately to income inequality. Intensified intangible capital growth in the industry stands to exacerbate this trend. Finally, our study suggests that financial deregulation, globalization, banking competition, and domestic credit expansion positively affect relative finance wages. Stricter labor market protection meanwhile dampens the impact of banking competition.
Factor Substitution Possibilities, Labor Share Dynamics, and Inequality in an Age of Intangibles, Review of Income and Wealth 71, February 2025, e12727.
Abstract: We examine the economy-wide degree of substitutability between intangible capital and other factor inputs in production using a large sample of advanced countries. In this context, we turn to studying the implications of intangible and tangible capital growth for labor income share dynamics. Compared to tangible capital, we find that intangible capital more strongly complements skilled labor. The analysis further indicates relative fungibility between tangible capital and a composite of intangible capital and skilled labor, in line with the rising prominence of knowledge-intensive tasks and AI-driven online platforms. The intrinsic nature of intangibles and their asymmetric effects across skilled and unskilled labor productivity based on our substitution elasticities suggest that intangible capital growth increases income inequality more aggressively.
Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability, Open Economies Review 35, July 2024, pp.497-545.
Abstract: This paper analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we find an inverse link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under regimes entailing lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing "current account"-"real exchange rate" relation. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility.
Interest Rate Volatility and Macroeconomic Dynamics: Heterogeneity Matters, (with Michael Curran), Review of International Economics 28, September 2020, pp.957-975. [supplementary appendix]
Abstract: We examine the relation between real interest rate volatility and aggregate fluctuations for a diverse sample of countries. Compiling a new dataset including emerging and advanced countries, the substantial variation in our data yields novel results: (i) stochastic volatility outperforms Markov-switching in representing interest rates, (ii) some advanced economies can be more volatile than emerging markets, and (iii) creditors take on more debt following volatility shocks. We show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity produces significant parameter differences, playing an important role in distinguishing the effects of volatility shocks.
The CAPM, National Stock Market Betas, and Macroeconomic Covariates: A Global Analysis, (with Michael Curran), Open Economies Review 31, September 2020, pp.787-820.
Abstract: Using global data on aggregate stock market prices, this paper finds that the standard capital asset pricing model (CAPM) fares much better than suggested in the literature. At shorter time horizons, our results also show that the positive risk-reward relation can collapse during times of high volatility. Compared to advanced and emerging markets, we retrieve evidence of lower systematic risks across frontier stock market portfolios. We find that countries characterized by higher levels of financial and trade openness, exchange rate volatility, and larger economic size are exposed to higher systematic covariances with the world stock market. Conversely, we obtain evidence of an inverse link between international reserves and systematic risks in national equity.
Real Exchange Rate Persistence and Country Characteristics, (with Michael Curran), Journal of International Money and Finance 97, October 2019, pp.35-56. [supplementary appendix]
Abstract: This paper examines the persistence of real exchange rates across 151 countries. We employ univariate time series techniques on a country-by-country basis allowing for deterministic structural breaks and nonlinearities in the adjustment process. Our findings suggest that bilateral exchange rates display higher rates of persistence than multilateral exchange rates, with the latter exhibiting half-lives of less than 1 year. Meanwhile, industrial countries are found to display higher levels of exchange rate inertia than developing countries. We retrieve evidence indicating that higher inflation, nominal exchange rate volatility, trade openness and proximity to reference country are associated with faster rates of real exchange rate convergence. Conversely, international financial integration is only found to be a significant factor at the country group level, with differential effects across cohorts.
International Investment Patterns: The Case of German Sectors, (with Vahagn Galstyan), Open Economies Review 29, July 2018, pp.665-685.
Abstract: In this paper we exploit the newly augmented Coordinated Portfolio Investment Survey data of the IMF to study the cross-border inter-sectoral portfolio asset holdings of Germany. Our analysis reveals a significant degree of heterogeneity in the international asset positions of various German holding entities. The findings of our study also suggest differential relations between portfolio holdings and a set of "gravity-style'' factors across holder-issuer pairings of various sectors. We conclude that aggregate-level patterns in international portfolio holdings may not persist in inter-sectoral data.
Public Debt and Relative Prices in a Cross-Section of Countries, (with Vahagn Galstyan), Review of World Economics [Weltwirtschaftliches Archiv] 154, May 2018, pp.229-245.
Abstract: This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.
Taxation, Debt and Relative Prices in the Long Run: The Irish Experience, (with Vahagn Galstyan), Economic and Social Review 48, September 2017, pp.231-251.
Abstract: This paper investigates the effects of public debt and distortionary labour taxation on the long-run behaviour of Irish relative non-traded goods prices. We highlight that higher public debt, acting through higher taxes, has an equivocal impact on the relative supply of non-traded goods and, correspondingly, relative prices. Our empirical analysis for Ireland suggests that taxes and public debt play significant roles in the long run, comoving negatively with the relative price of non-tradables. Accordingly, shifts in public debt and taxation bear implications for the country's international price competitiveness.
Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective, (with Vahagn Galstyan), Journal of International Money and Finance 70, February 2017, pp.452-470.
Abstract: In this paper we empirically analyze nonlinearities in short-run real exchange rate dynamics. Our findings suggest that real exchange rate misalignments are considerably less persistent and more volatile during times of high debt. Assessing the variance of changes in misalignments, we retrieve evidence indicating that the nominal exchange rate and inflation differentials are more important determinants in states of high debt than in states of low debt. Overall, our results imply that nonlinearities have non-negligible implications for the mechanics of real exchange rate adjustment in emerging markets.
Working Papers:
On Finance's Heterogeneous Labor Share Dynamics: A Neoclassical Perspective, November 2023.
Abstract: Across the developed world, we find that labor's share of income at the sectoral level has experienced a much lower decline in finance than in the remainder of the market economy. We examine how well these heterogeneous sectoral dynamics can be explained by the neoclassical growth model. The framework is able to predict the direction and magnitude of labor share changes in both finance and non-finance through a combination of capital-labor complementarity and net labor-augmenting technical change. The underlying supply-side decomposition reveals that the lower labor share decline in finance is a reflection of its weaker net labor-augmenting productivity growth. The latter counters the stronger capital-labor synergies and capital intensity in the sector, which act to inflate the absolute size of labor share changes. Labor- and capital-biased productivity growth both tend to be higher in finance consistent with higher profitability in the industry.
Automation, New Technology, and Non-Homothetic Preferences, (with Clemens Struck), May 2017.
Abstract: This paper provides a microfoundation of the neoclassical growth theory. To rationalize a substantial share of labor in income despite ongoing automation of tasks, we present a simple model in which demand shifts toward goods of increasing sophistication along a vertically differentiated production structure. Automation of more advanced goods requires increasingly sophisticated capital which remains scarce along the growth path. This is why labor maintains a substantial share in income independent of core parameter assumptions. While our model features an entirely different mechanism, we show that its aggregate representation is the one of a neoclassical model with labor-augmenting technical change.
Solving Leontief's Paradox with Endogenous Growth Theory, (with George Sorg-Langhans and Clemens Struck), March 2017. previous version here
Abstract: Theories of international trade have severe difficulties in explaining why, despite i) substantial differences in factor-proportions across industries and ii) considerable cross-country differences in capital-labor ratios, the iii) capital intensity of U.S. imports does not vary systematically across countries. We propose a relatively simple explanation: standard trade theories disconnect assumptions about productivity from other core model parameters. In a standard macroeconomic model, we show that appropriately accounting for the factor-bias of productivity, in conjunction with endogenous capital formation, eradicates the gains from factor-proportions trade and can thus reconcile the three aforementioned stylized facts.
To Augment Or Not To Augment? A Conjecture On Asymmetric Technical Change, (with Clemens Struck), January 2017.
Abstract: Recent empirical evidence for the U.S. points to a non-increasing share of labor in income and complementarity between capital and labor. According to standard macroeconomic theory, these facts imply that productivity growth should be labor-augmenting. Analyzing post-war U.S. data, we however find that technical progress is rather evenly distributed across capital- and labor-intensive industries. To reconcile standard theory with the evidence, we stress inflation measurement errors in the data. If aggregate inflation is annually overstated by as little as a third of a percentage point, technical progress is already over 50 percent higher in labor-intensive industries than in capital-intensive industries.
Relative Prices, Non-Homothetic Preferences, and Product Quality, (with Clemens Struck), August 2016.
Abstract: This paper develops a novel theory of price level differences across countries. In a model characterized by a quality hierarchy in demand, we demonstrate that GDP per capita growth leads to higher average product quality in consumption as demand shifts toward higher quality goods. In turn, such structural change in expenditure shares engenders ongoing labour reallocations toward the higher-quality goods, which are more difficult to produce, thus commanding higher prices. As a result, economic growth induces a rise in the aggregate price level of the country. As we show, this implies that countries experiencing higher relative levels of economic development observe relatively appreciated real exchange rates.
Competing Gains From Trade, (with Clemens Struck), May 2016.
Abstract: Differences in growth rates across countries imply a strong relation between factor-proportions-based trade and key aggregate economic outcomes. We construct two macro-trade datasets and illustrate that this relation is rather weak empirically. Employing a dynamic two-country model, we propose a simple explanation for this finding. By limiting the substitutability between domestic and foreign tradable varieties, the presence of intra-industry trade implies that pronounced trade specialization patterns culminate in a loss of varieties. Accordingly, intra-industry trade acts to suppress inter-industry trade dynamics, thus realigning the behavior of standard models with the empirical evidence.