Working Papers
with Vladimir Asriyan, Luc Laeven, Alberto Martin, and Victoria Vanasco
Accepted at Review of Economic Studies.
Abstract:
We show that in a canonical model with heterogeneous entrepreneurs, financial frictions, and an imperfectly elastic supply of capital, a fall in the interest rate has an ambiguous effect on aggregate economic activity. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, however, this higher demand for capital raises its price and crowds out investment by more productive entrepreneurs. When this general-equilibrium induced reallocation is strong enough, a fall in the interest rate reduces aggregate output. We show that this reallocation effect is of the same order of magnitude as the balance-sheet channel, and that the interaction of both gives rise to boom-bust dynamics in response to a fall in the interest rate. Our novel mechanism contributes to the debate on whether and how low-interest environments may foster the proliferation of socially unproductive activities.
with Javier Bianchi
Abstract:
This paper shows that international equity flows create a time inconsistency problem for monetary policy. When foreign investors own domestic equity, the government is tempted to depart from full employment to reduce foreign investors' profits. Anticipating low returns, investors buy equity at reduced prices, leading to a reduction in domestic households' wealth. Moreover, we show that households sell too much equity in the competitive equilibrium and that this can give rise to coordination failures. Unlike existing theories, the model suggests the desirability of capital controls on equity inflows.
with Ander Perez-Orive and Yannick Timmer
Abstract:
Firms often face multiple financial constraints. We show theoretically that monetary policy transmits into economic activity in part by influencing which credit constraints are more likely to bind at each point in time. Our model predicts that the more constraints a firm faces, the more muted the response of its borrowing and investment to monetary policy easings but the stronger the response to tightenings, especially if the constraints have very different interest rate sensitivities. We test this implication using US firm microdata and provide evidence in favor of this asymmetric monetary transmission through our novel channel. At the aggregate level, we find, both empirically and in model-based simulations, that our asymmetric monetary transmission channel is quantitatively significant. Moreover, our mechanism can account for a large part of the well-documented, but so far unexplained, asymmetric response of aggregate investment and employment to monetary policy, and can explain slow recoveries from recessions when a large share of firms is financially constrained.
with Miguel Ampudia, Manuel Muñoz, and Frank Smets
Abstract:
We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks' capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.
with Antoine Camous
VOXEU Column; Short video presentation
Abstract:
Classical accounts of financial crises emphasize the joint contribution of extrapolative beliefs and leveraged risk-taking to financial instability. This paper proposes a simple macro-finance framework to evaluate these views. We find a novel interplay between non-rational extrapolation and investment risk-taking that amplifies financial instability relative to a rational expectation benchmark. Furthermore, the analysis provides guidance on the design of cyclical policy intervention. Specifically, extrapolative expectations command tighter financial regulation, irrespective of the regulator's degree of non-rational extrapolation.
Abstract:
I study benefits of macroprudential regulation in economies with a potentially binding effective lower bound (ELB) on nominal interest rates. Optimal regulation boosts real interest rates unintentionally, simply as a by-product of safeguarding stability in financial markets. Thus optimal regulation also boosts the natural rate of return (i.e., the equilibrium real interest rate that is consistent with inflation on target and production at full capacity). These results point to a novel complementarity between financial stability and macroeconomic stabilization. Complementary is sufficiently strong to generate a divine coincidence if the natural rate under no regulation is low, but not too low.
with Alexander Rodnyansky and Daniel Wales
Abstract:
This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy's response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence.