Research
Published Papers:
Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? (CEPR Working paper)
Journal of Money, Credit and Banking
(with Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri)
Media coverage: VoxEU Blog, IMF Blog
We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
Policy Packages and Policy Space: Lessons from COVID-19
(with Kristin Forbes )
Media coverage: VoxEU Blog
This paper uses the onset of COVID-19 to examine how countries construct their policy packages in response to a severe negative shock. We use several new datasets to track the use of a large variety of policy tools: announced fiscal stimulus (both above- and below-the-line), monetary policy (through interest rates, asset purchases, liquidity support and swap lines), foreign currency intervention, adjustments to macroprudential regulations (including the countercyclical capital buffer) and changes in capital controls (on inflows and outflows). The results suggest that pre-existing policy space was usually more important than other country characteristics and the extent of “stress” (in economic, financial, and health measures) in determining how a country responded to COVID-19. The notable exception is for fiscal stimulus, for which existing policy space did not act as a significant constraint in advanced economies. This is a sharp contrast to results for earlier episodes—although advanced economies with higher debt levels may have been constrained in how they provided stimulus (with more below-the-line commitments). Moreover, the use of (and space available) for each policy tool usually did not affect a country’s use of other policies. This suggests that countries are not coordinating their tools optimally in an integrated framework, especially when policy space is limited for certain tools.
The Anatomy of the Transmission of Macroprudential Policies: Evidence from Ireland (Latest Version)
(with Viral Acharya, Matteo Crosignani, Tim Eisert, and Fergal McCann)
We analyze the transmission of macroprudential policies aimed at limiting household leverage and preserving financial stability. Combining supervisory loan-level and house price data, we examine the effect of loan-to-income and loan-to-value limits on mortgage credit, house prices, and financial stability. We find that banks reallocate their mortgage credit toward high-income borrowers and areas with low house price appreciation. This reallocation slows down house prices in "hot" areas, but allows banks to maintain a stable risk exposure as they increase mortgage credit to historically risky borrowers, corporate credit to risky firms, and holdings of high-yield securities.
The Role of Stock-Flow Adjustment during the Global Financial Crisis
Journal of International Money and Finance
Media coverage: DIW Roundup, ECB Occasional Paper
While the recent contraction of current account imbalances that followed the Global Financial Crisis is well documented, we analyse the increasing divergence of the net international investment position in the post-crisis period. Decomposing the change in the international net investment position into capital flows and valuation effects we find that the increasing stock imbalances are driven by the former. However, valuation changes show a stabilizing pattern. Countries with the largest net foreign liabilities experienced the greatest valuation gains. Analysing this effect by different asset classes shows that this stabilising pattern was mainly driven by debt write-offs and a change in the value of portfolio equity. For the latter, the pro-cyclical movement of the domestic stock markets during the post-crisis period improved international risk sharing through foreign portfolio equity liabilities.
Book Chapters:
Macroprudential Policy during COVID-19: The Role of Policy Space (NBER WP and CEPR WP)
(with Kristin Forbes )
forthcoming as Chapter 4 in "Macro-financial Stability Policies in a Globalized World" (Edited by Claudio Borio, Edward Robinson, and Hyung Song Shin)
This paper uses the initial phase of the COVID-19 pandemic to examine how macroprudential frameworks developed over the past decade performed during a period of heightened financial and economic stress. It discusses a new measure of the macroprudential stance that better captures the intensity of different policies across countries and time. Then it shows that macroprudential policy has been used countercyclically—with stances tightened during the 2010’s and eased in response to COVID-19 by more than previous risk-off periods. Countries that tightened macroprudential policy more aggressively before COVID, as well as those that eased more during the pandemic, experienced less financial and economic stress. Countries’ ability to use macroprudential policy, however, was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID-19. The use of macroprudential tools was not significantly affected by the space available to use other policy tools (such as fiscal policy, monetary policy, FX intervention, and capital flow management measures), and the use of other tools was not significantly affected by the space available to use macroprudential policy. This suggests that although macroprudential tools are being used countercyclically and should therefore help stabilize economies and financial markets, there appears to be an opportunity to better integrate the use of macroprudential tools with other policies in the future.
Working Papers:
Cross-border Spillovers: How US Financial Conditions affect M&As Around the World (NBER WP)
R&R
(with Prachi Mishra and Raghuram Rajan)
We find that financial conditions in the core have significant spillover effects on cross-border mergers and acquisitions (M&As). On average, a 1 percentage point easing of the IMF US Financial Conditions Index is associated with approximately a 10% higher volume of cross-border M&As. The spillovers are stronger for countries with more liabilities denominated in foreign currency (or in US dollars). We find that the spillovers are driven by changes in US financial conditions, rather than changes in Euro Area conditions. Deals that happen when financial conditions in the US are tighter (and therefore acquisitions fewer) add more value for the acquirers, as reflected in higher acquirer excess stock returns around the announcement.
International capital flows at the security level: evidence from the ECB's Asset Purchase Programme (IMF Working Paper)
R&R
(with Martin Schmitz)
Awarded BEST PAPER at ECMI Annual Meeting 2018
Media coverage: Speech by Benoît Cœuré, Speech by Governor Philip R. Lane; Article on centralbanking.com
We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme (APP) at the security level. Based on net transactions of domestic and foreign securities, we observe euro area sectors' capital flows into individual securities, cleaned from valuation effects. Our empirical analysis -- which accounts for security-level characteristics -- shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme (PSPP) and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
From Polluting to Green Jobs: A Seamless Transition in the U.S. (IMF working Paper)
R&R
Watch our Analytical Corner Talk! Other media coverage: IMF Blog
(with Rui Mano and Ippei Shibata )
What are the implications of the needed climate transition for the potential reallocation of the U.S. labor force? This paper dissects green and polluting jobs in the United States across local labor markets, industries and at the household-level. We find that geography alone is not a major impediment, but green jobs tend to be systematically different than those that are either neutral or in carbon-emitting industries. Transitioning out of pollution-intensive jobs into green jobs may thus pose some challenges. However, there is a wage premium for green-intensive jobs which should encourage such transitions. To gain further insights into the impending green transition, this paper also studies the impact of the Clean Air Act. We find that the imposition of the Act caused workers to shift from pollution-intensive to greener industries, but overall employment was not affected.
Winning the War? New Evidence on the Measurement and the Determinants of Poverty in the United States (IMF Working Paper)
(with Andrea Medici and Anke Weber)
Using micro-data from household expenditure surveys, we document the evolution of consumption poverty in the United States over the last four decades. Employing a price index that appears appropriate for low income households, we show that poverty has not declined materially since the 1980s and even increased for the young. We then analyze which social and economic factors help explain the extent of poverty in the U.S. using probit, tobit, and machine learning techniques. Our results are threefold. First, we identify the poor as more likely to be minorities, without a college education, never married, and living in the Midwest. Second, the importance of some factors, such as race and ethnicity, for determining poverty has declined over the last decades but they remain significant. Third, we find that social and economic factors can only partially capture the likelihood of being poor, pointing to the possibility that random factors (“bad luck”) could play a significant role.
Forbearance Patterns in the Post-Crisis Period (IMF Working Paper)
(with Thore Kockerols)
Media coverage: Brookings
Using supervisory loan-level data on corporate loans, we show that banks facing high levels of non-performing loans relative to their capital and provisions were more likely to grant forbearance measures to the riskiest group of borrowers. Further dissecting this phenomenon, we find that risky borrowers are more likely to get an increase in the overall limit or the maturity of a loan product from a distressed lender. As a second step, we analyse the effectiveness of this practice and show that borrowers who received forbearance measures are more likely to default. Our evidence also suggests that forbearance and new lending are substitutes for banks, as high shares of forbearance are negatively correlated with new lending to the same group of borrowers.
Other Publications:
"Dampening Global Financial Shocks in Emerging Markets: Can Macroprudential Regulation Help?" (with Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri)
Published as: World Economic Outlook, Chapter 3, April 2020. IMF blog
Quantitative Easing and Portfolio Rebalancing: Micro Evidence from Irish Resident Banks
Published as Central Bank of Ireland Economic Letter
“International financial flows and the Eurosystem’s asset purchase programme: evidence from b.o.p and security by security data”
(with Martin Schmitz)
Chapter of IFC Bulletin "Are post-crisis statistical initiatives completed?", forthcoming [Presentation]