Research

Working Papers

Foreign Direct Investment and the Equity Home Bias Puzzle (Banco de España Working Paper Version, March 2020)

with Mathias Hoffmann and Sven Blank, Deutsche Bundesbank

The vast macroeconomic literature trying to explain the widely observed equity home bias disregards internationally active firms. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are biased towards domestic firms. Our finding indicates that international diversification is not as bad as empirical measures of the equity home bias suggest.

International Co-Movements in Recessions (Banco de España Working Paper Version, January 2018)

Business cycle correlations are state-dependent and higher in recessions than in expansions. In this paper, I suggest a mechanism to explain why this is the case. For this purpose, I build an international real business cycle model with occasionally binding constraints on capacity utilization which can account for state-dependent cross-country correlations in GDP growth rates. The intuition is that firms can only use their machines up to a capacity ceiling. Therefore, in booms the growth of an individual economy can be dampened when the economy hits its capacity constraint. This creates an asymmetry that can spill-over to other economies, thereby creating state-dependent cross-country correlations in GDP growth rates. Empirically, I successfully test for the presence of capacity constraints using data from the G7 advanced economies in a Bayesian threshold autoregressive (T-VAR) model. This finding does not only support capacity constraints as a prominent transmission channel of cross-country GDP asymmetries in recessions compared to expansions, it also supports the benchmark calibration of the theoretical model with tradable intermediary goods being complementary to a certain degree.

Work in Progress

The Real Effects of Trade Uncertainty

with Silvia Albrizio, Alejandro Buesa and Francesca Viani (Banco de España)

In light of the recent trade tensions, this paper identifies the impact of general and trade-specific policy uncertainty on macroeconomic outcomes in the US, China and the Euro Area. We use gold prices and global trade indices to disentangle trade uncertainty from general uncertainty in a Proxy S-VAR model. We find that while both shocks have negative effects on industrial production and new export orders, trade uncertainty affects those variables in a more persistent manner. Furthermore, we find that general policy uncertainty significantly increases high yield corporate spreads, while the effect is close to zero for trade uncertainty effects.

Real Interest Rates and the Redistribution of Nominal Wealth in the Euro Area

with Panagiota Tzamourani (Deutsche Bundesbank), Maarten Dossche, Antonio Matas-Mir (ECB) and Jacob Hartwig (Paris School of Economics)

This project assesses the financial portfolio positions of households and other economic sectors in the countries of the European Monetary Union (EMU) with the aim to investigate how their portfolio choices led them to financial gains or losses during an episode lower than expected inflation and lower than expected interest rate that characterized the EMU at least since the introduction of QE measure by the ECB in 2015, if not before. For this purpose, we combine data from the European Sectoral Accounts, the Household Finance and Consumption Survey (HFCS) and other data sources to calculate each sectors and households net nominal position which characterizes its nominal price exposure as well as its uncovered interest rate exposure, which characterizes an agent’s exposure to real interest rate changes. We implement scenarios which help us quantify each agent’s gains and losses according to different inflation and interest rate paths.

Older work

Sovereign Bailouts: Why defaults are possible in a union after all

In recent years members of the European Monetary Union repeatedly provided bailout packages for member countries in need of financial assistence. Although bailout programmes were so far always granted, the question arisies if there could be situations in which the union members would refuse a bailout to another country. To investigate this question, I build a model of cross-country holdings of sovereign debt with the possibility of default, as well as the possibility to negotiate a bailout for a struggling country. I show that if there is a representative households in each individual member country, there will always be a solution involving a bailout and no outright default on government debt will occur. In a second version of the model, that involves heterogeneity in household wealth within the bailout providing country, the utilitarian government of this country finds it optimal to refuse a bailout in some states of the world. This example shows that theoretically it is possible that an indebted union member defaults outright on its debt and other member countries refuse a bailout package.