Research
Publications
Gold as international reserves: A barbarous relic no more? (with Serkan Arslanalp and Barry Eichengreen), 2023, Journal of International Economics
Abstract: After falling for decades, central bank gold holdings have risen since the Global Financial Crisis. We identify 14 “active diversifiers,” countries that purchased gold and raised its share in total reserves by 5 or more percentage points over the last two decades. In contrast to the diversification of foreign currency reserves, which has been undertaken by advanced and developing country central banks alike, diversifiers into gold are exclusively emerging markets. We document two sets of factors contributing to this trend. First, gold is seen as a safe haven in periods of economic, financial and geopolitical volatility. Second, financial sanctions by the US, UK, EU and Japan, the main reserve-issuing economies, are associated with an increase in the share of central bank reserves held in the form of gold.
The Stealth Erosion of Dollar Dominance and the Rise of Nontraditional Reserve Currencies (with Serkan Arslanalp and Barry Eichengreen), 2022, Journal of International Economics
Abstract: We document a decline in the dollar share of international reserves since 1999. This decline reflects active portfolio diversification by central bank reserve managers, rather than changes in exchange rates and interest rates, reserve accumulation by a handful of central banks with distinctive balance sheets, or changes in coverage of surveys of reserve composition. Strikingly, the shares of the euro, yen and pound sterling have not concurrently increased. Instead, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role in reserves. The evolution of the international reserve system in the last 20 years is thus a gradual movement away from the dollar, a modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies.
Working Papers
Risk Sharing and Policy Convergence in Economic Unions
Abstract: Countries in an economic union benefit from fiscal risk sharing due to enhanced macroeconomic linkages and the loss of national monetary policy. The ability to share risks is, however, constrained by a political need to limit long term transfers between countries. Risk sharing might therefore be underpinned by the goal of convergence of national economic institutions - a long term commitment to implement best practice policies. From an optimal contracting perspective, it would make sense to build incentives for economic reform into any risk sharing agreement, by conditioning transfer amounts on reform outcomes. In this paper, we model an economic union as a risk sharing contract with two-sided limited commitment and moral hazard to explore how risk sharing is optimally traded off against incentives to complete long term reforms. We then consider a mechanism for implementing the constrained efficient allocation using active management of intergovernmental liabilities.
Public Insurance in Heterogeneous Fiscal Federations - Evidence from American Households (with Johannes Fleck)
Abstract: The literature on fiscal federalism usually argues that policies involving income reallocation should be administered by the highest level of government. This argument, however, neglects a uniformity constraint, which limits regional variation in tax and welfare policies. Our paper explores the extent to which income support for poor households varies across US states due to the interaction between the federal government's uniformity constraint and regional variations in local economic conditions and the net transfer policies of state governments. Our results are based on a simulation of the combined response of federal and state net transfers to a pre-tax earnings shock. They point to large differences in the level of insurance against income shocks experienced by low income households in different states.
Fiscal and Currency Union with Default and Exit (with Alessandro Ferrari and Ramon Marimon)
Abstract: We study the optimal designs of a Fiscal Union with independent currencies and of a Monetary and Fiscal Union (Currency Union) and their relative performance. We derive the optimal fiscal-transfer policy in these unions as a dynamic contract subject to enforcement constraints, whereby in a Currency Union each country has the option to unpeg from the common currency, with or without default on existing obligations. Our analysis shows that the lack of independent monetary policy, or an equivalent independent policy instrument, limits the extent of risk-sharing within a Currency Union. It also shows that the optimal state-contingent transfer policy implements a constrained efficient allocation that minimises the losses of the monetary union; that is, the fiscal transfer policy is complementary to monetary policy. At the steady state, welfare is lower than in a Fiscal Union with independent monetary policies. However, with nominal rigidities and only one shock disrupting consumption, risk-sharing reduces the cost of losing independent monetary policy and, as a result, the welfare loss for having a Currency Union can be quantitatively very small. Nevertheless, this almost-equivalence welfare result breaks down when, for example, there is another shock disrupting consumption: the Fiscal Union with independent currencies can confront both shocks separately, which can not be done with the constrained efficient complementary mix in a Currency Union. Importantly, these results – in particular, the lower value of the Currency Union – change when there are trade costs associated with independent monetary policies, unless these costs are (counterfactually) negligible. If they are not, Currency Union dominates Fiscal Union. In the latter the constrained efficient fiscal-transfers policy, accounts for these costs, limiting the extent of risk-sharing, while efficiently assigning the trade costs associated with the transfers.