Research
Work in progress
"To Bail-in or to Bailout: that's the (Macro) Question," (2022) with Christiaan van der Kwaak.
Abstract: In this paper we construct a dynamic general equilibrium model with limited liability banks to compare financial stability and macroeconomic outcomes under a regime in which banks are bailed out by the government with outcomes under a regime in which bank creditors are bailed in. We find that long-run investment, capital, output, and consumption are higher under the bailout regime. Bailouts also mitigate the impact of financial crises with respect to the bail-in regime, as lower funding costs increase banks' profitability. Bailouts, however, introduce moral hazard, which substantially increases the fraction of banks that need to be recapitalized from 0.24% per quarter under the bail-in regime to 3.12% per quarter under the bailout regime. The frequency of financial crises, however, hardly increases. Finally, we find that welfare is highest under the bailout regime.
"Structural Reforms, Sovereign Default Risk, and the Zero Lower Bound," (2020).
Abstract: In this paper we investigate the interaction between sovereign default risk and structural reforms at the zero lower bound. We do so in a quantitative two country model of a currency union calibrated to the core and periphery of the Eurozone with a tradable-non-tradable production structure and nominal rigidities, where the periphery of the Eurozone is subject to sovereign default risk. In line with the literature, we find that structural reforms, in the form of an increase in price and wage flexibility, lead to output losses at the zero lower bound. Sovereign default risk increases these output losses, and structural reforms further heighten the probability of a sovereign default. We examine whether fiscal policy, both expansionary and contractionary, fares better in such a situation. We find that a fiscal contraction in the country subject to sovereign default risk only slightly decreases the probability of sovereign default and causes another round of output losses. Contrary to previous findings in the literature, we find that a fiscal expansion in the core has small output effects on the periphery. We show that the positive spillover effects of a fiscal expansion in the core are much larger if the core government simultaneously buys the periphery's exports and increases the share of periphery exports in core public expenditure.
"Liability Dollarization, Bank Bail-Ins, and Exchange Rate Dynamics," with Christiaan van der Kwaak.
"A Theory of Financial Panics and Bank Bail-Ins."