Lenders' Expectations and Sovereign Debt Crises Contagion [Draft]
Abstract: This paper investigates how lenders' expectations may have fueled the propagation of the Greek crisis to other Eurozone periphery countries (i.e., Italy, Spain, Ireland, and Portugal). Using data from the Consensus Economics survey, I classify lenders by their GDP growth forecast precision before the crisis. During the crisis, less precise lenders adjusted their GDP growth and sovereign bond yield forecast against the rest of the Eurozone periphery relatively more than their more precise counterparts. Consequently, less precise lenders also shifted their portfolios away from the Eurozone periphery countries relatively more. In line with a model where some lenders rely on broad categories, such as the Eurozone periphery, the less precise lenders display a stronger GDP forecast correlation between Greece and other Eurozone periphery countries, driving these empirical results. By incorporating this mechanism into a two-country sovereign default model, I quantify that less precise lenders might have reduced Italian bond prices by almost 11 percent more than Bayesian lenders.
Banks' Inflation Expectations and Credit Allocation: the Expected Fisher Effect [Draft]
With Filippo De Marco (Bocconi)
Abstract: This paper investigates how lenders' inflation expectations shape credit allocation. Banks expecting higher inflation reallocate credit towards ex-ante leveraged firms, which benefit from a reduction in real debt burdens. To test this hypothesis, we combine individual bank macroeconomic forecasts for developed economies with syndicated loan data from 1991 to 2021. We show that banks expecting a 1 percentage point higher inflation over the next year extend loans that are 15% larger and 17 basis points cheaper to firms with high long-term leverage, relative to banks with lower inflation expectations. Importantly, the effects are not present for firms with high short-term leverage, whose real value is harder to reduce. Consistent with this pattern, firms receiving loans from banks with higher inflation expectations increase their capital expenditure relative to otherwise similar firms borrowing from banks with lower expectations.
Anchor Stabilization Plans and Exports Structure [Draft]
Abstract: This paper examines how export composition changes when a government implements an inflation stabilization plan that relies on the exchange rate as its main policy instrument. I show that such plans increase the share of capital-intensive sectors in total exports. To explain this finding, I develop a multisectoral general equilibrium model that incorporates three types of tradable sectors: capital-intensive, labor-intensive, and land-intensive. The model replicates this new empirical finding. Furthermore, the model successfully reproduces the key stylized facts documented in the literature on inflation stabilization plans.
Sovereign Default Risk Contagion: The Tequila Crisis Effect on Argentina's Default Probability
Banks' Inflation Expectations, Firm Cash Hold, and Markups
With Filippo De Marco (Bocconi)
Frenkel, R., and Friedheim, D. (2017). Inflation in Argentina during the 2000s. Journal of Post Keynesian Economics, 40(1), 43-60. [Download]
Vegh, C. A., Morano, L., Friedheim, D., and Rojas, D. (2017). Between a rock and a hard place: the monetary policy dilemma in Latin America and the Caribbean. World Bank. [Download]
Vegh, C. A., Vuletin, G., Riera-Crichton, D., Friedheim, D., Morano, L., and Camarena, J. A. (2018). Fiscal Adjustment in Latin America and the Caribbean: Short-Run Pain, Long-Run Gain?. The World Bank. [Download]
Vegh, C. A., Vuletin, G., Riera-Crichton, D., Medina, J. P., Friedheim, D., Morano, L., and Venturi, L. (2018). From known unknowns to black swans: How to manage risk in Latin America and the Caribbean. [Download]