Working Papers
Inflation and the Price of Real Assets (with Matteo Leombroni, Monika Piazzesi and Martin Schneider)
Revise and Resubmit, Review of Economic Studies
In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Disagreement about inflation across age groups matters for the size of tax effects, the volume of nominal credit, and the price of housing as collateral.
Money Markets, Collateral and Monetary Policy (with Fiorella De Fiore, Marie Hoerova and Harald Uhlig) (NEW DRAFT)
Revise and Resubmit, Review of Economic Studies
We document severe impairments in Eurozone interbank money markets from 2010 to 2015: the share of unsecured interbank borrowing declined, bank borrowing from the European Central Bank as well as sovereign bond haircuts increased in Southern countries, while household deposits at banks remained stable. We construct a quantitative general equilibrium model to evaluate these developments, their macroeconomic impact, and the policy response. Our model features heterogeneous banks and sovereign bonds, secured and unsecured money markets, and a central bank. We compare a benchmark policy where the central bank can lend to banks against collateral to an alternative policy that maintains the central bank’s balance sheet constant. We show that the observed developments in money markets under the alternative policy would have caused a decline in output, investment, and capital twice as large. More generally, the model allows the analysis of monetary policy tools beyond interest rate policies and quantitative easing.
Quantitative Easing and Local Banking Systems in the Euro Area
This paper studies the role of local banking systems in the propagation of ECB Quantitative Easing (QE) programs. I firstly document that local deposit markets are fragmented across country lines, but the assets held by banks backing the deposits are in more integrated markets. I then consider a multi-country New Keynesian model with heterogeneous banking sectors but common monetary policy. All banks can access collateral from the same union-wide asset market, using them to back liquid deposit liabilities that are issued locally. QE has real effects if it increases the quantity or quality of collateral available to the banking sector. I find that QE has a powerful effect across the currency union, raising output and inflation by 62bps and 60bps, respectively. The pass-through is very similar across countries, despite fragmented deposit markets, as all banks face the same reduction in the cost of collateral from the union-wide asset market. The overall impact increases significantly if the beginning of QE coincides with adjusting the Taylor rule to be a weaker counteracting force by making it less responsive to inflation.
Risky Insurance: Life Cycle Insurance Portfolio Choice with Incomplete Markets (with Joseph Briggs and Christopher Tonetti)
We use a new survey to document significant perceived nonpayment risk in annuity, life insurance, and long-term care insurance markets. That is, people perceive a substantial risk that insurance will not pay out when it should. In preliminary analysis, we find that nonpayment risk significantly predicts insurance product ownership, and that annuity and long-term care insurance ownership would be approximately twice as high if products were perceived as risk-free. To interpret our measures, we develop a new life-cycle model of the joint demand for these three products that allows for uninsurable nonpayment risk as well as incomplete markets along other dimensions. We find that these risks significantly decrease insurance demand, resulting in small observed welfare losses from sub-optimal insurance portfolio holdings. However, the welfare costs of nonpayment risk and incomplete markets - whether real or perceived - are large relative to a complete market benchmark
Money and Banking in a New Keynesian Model (with Monika Piazzesi and Martin Schneider)
This paper studies a New Keynesian model with a banking system. The central bank targets the interest rate on short safe bonds that are held by banks to back inside money and hence earn convenience yield for their safety or liquidity. Central bank operating procedures matter. In a floor system, the reserve rate and the quantity of reserves are independent policy tools that affect banks' cost of safety. In a corridor system, increasing the interbank rate by making reserves scarce increases banks' cost of liquidity and generates strong pass-through to other rates of return, output and inflation. In either system, policy rules that do not respond aggressively to inflation - such as an interest rate peg - need not lead to self-fulfilling fluctuations. The stabilizing effect from an endogenous convenience yield is stronger when there are more nominal rigidities in bank balance sheets.
Household Portfolios, Monetary Policy and Asset Prices (with Matteo Leombroni)
In this paper, we study the role of household portfolio rebalancing channel for the aggregate and redistributive effects of monetary policy. The transmission of monetary policy works not only through the usual income and substitution motives, but also through an endogenous portfolio rebalancing effect which generates changes in equilibrium asset prices and a subsequent wealth effect on consumption. In order to jointly study these effects, we introduce a heterogeneous household life-cycle model with multiple assets and combine it with an incomplete markets asset pricing framework. We model monetary policy shocks as a reduction in expected return on safe assets. In equilibrium the reduction in bonds investment prompts a portfolio rebalancing toward riskier assets with a consequent increase in their asset prices and an increase in wealth. According to our model, the positive wealth effect on consumption is offset by an increase in the saving margin induced by the overall reduction in expected return on household portfolio. However, the strength of these two forces notably varies depending on households age. We find that, absent wealth effects, older cohorts reduce consumption while younger cohorts barely adjust. The direction of heterogeneity then reverses once we incorporate wealth effects, where older cohorts increase consumption significantly more than the young.
Work in Progress
The Cross-Sectional Risk Exposure of Insurance Companies (with Stelios Kotronis and Matteo Leombroni)
Using novel regulatory data from the European Insurance and Occupational Pensions Authority (EIOPA), we study the cross-sectional risk exposure of EU insurance companies using a factor approach