Research

Abstract:  We estimate the high frequency effects of dollar swap line announcements on asset prices.  News about expanded dollar swap lines causes a reduction in liquidity premia and the VIX, a depreciation of the dollar, and an increase in equity prices.  There is no change in short-term policy rates and the response of long-term government bond prices is mixed.  These effects are qualitatively consistent with a model in which dollar swap lines increase the supply of safe dollar liquidity and affect allocations independent of conventional policy.

Abstract: We study a business cycle model of the international monetary system featuring a time-varying demand for safe dollar bonds, greater risk bearing capacity in the U.S. than the rest of the world, and nominal rigidities.  A flight to safety generates a dollar appreciation and decline in global output.  Dollar bonds thus command a negative risk premium and the U.S. holds a levered portfolio of capital financed in dollars.  We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility; U.S. external adjustment; and the international transmission of monetary and fiscal policies, including dollar swap lines.

Abstract: We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment.  Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin.  An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy.  Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.3-1.4 times.

Abstract: In modern monetary economies, most payments are made with inside money provided by payment intermediaries. This paper studies interest rate dynamics when payment intermediaries value short bonds as collateral to back inside money. We estimate intermediary Euler equations that relate the short safe rate to other interest rates as well as intermediary leverage and portfolio risk. Towards the end of economic booms, the short rate set by the central bank disconnects from other interest rates: as collateral becomes scarce and spreads widen, payment intermediaries reduce leverage and increase portfolio risk. Structural change induces low frequency shifts that mask otherwise stable business cycle relationships.

Abstract: We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets.  These shocks differ in their induced comovements between exchange rates, interest rates, and quantities.  A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate.   Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. 

Abstract: We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates.  As in the preferred habitat tradition, habitat investors and arbitrageurs trade bonds of various maturities.  As in the intermediary asset pricing tradition, the wealth of arbitrageurs is a state variable which affects equilibrium term premia.  When arbitrageurs' portfolio features positive duration, an unexpected fall in the short rate revalues wealth in their favor and compresses term premia.  A calibration to the U.S. economy accounts for the effects of monetary shocks along the yield curve.  We discuss the additional implications of our framework for state-dependence, endogenous price volatility, and trends in term premia from a declining natural rate.

Abstract: I study how quantities of safe bonds affect asset prices and lending volumes in financial markets. In a quantitative model, heterogeneous agents trade securities of different maturity and risk exposure. Risk-tolerant investors issue collateralized bonds to obtain leverage and to insure the risk-averse. Despite the presence of higher return assets, the most risk-tolerant hold long-maturity safe assets, which they value as good collateral. The value of collateralizability is high when safe bond quantities are low. Given measured variations in safe bond quantities between 1990 and 2015, the model replicates the dynamics of lending volumes and generates large, volatile credit spreads and excess return predictability. The model also predicts price effects of high-frequency changes of government debt quantities around tax due dates. In policy experiments, I use the model to study the effects of large-scale asset purchases.

This paper studies why most bond issuing firms also obtain funding from bank loans and credit lines. An entrepreneur has access to a risky investment opportunity, which is profitable ex-ante but might become unprofitable at an intermediate stage. The entrepreneur has incentives to continue an unprofitable project, which he can do if initial public borrowing has raised enough funds to also finance the project continuation. Only the bank is permanently present in the market and can provide and cancel funding on short notice. The dependence on a bank credit line constrains the entrepreneur's continuation decision, thereby increasing ex-ante and ex-post efficiency. Bank loans act as a complement to public debt, rather than as a substitute. A contraction in bank loan supply limits access to bond financing. I conclude that public debt markets cannot always mitigate banking crises.