Research
Publications
The Preferential Treatment of Green Bonds - joint Francesco Giovanardi, Lucas Radke, and Matthias Kaldorf
(In press, Review of Economic Dynamics)
(Blog post for University of Cologne; Research Brief for Deutsche Bundesbank; Policy Brief for SUERF; Article in Börsenzeitung (German), Blog post for VoxEU)
(Covered in Climate Change and Monetary Policy in the Euro Area (November 2023) - European Parlaiment)
We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.
Work in Progress & Working Paper
Experience-Based Heterogeneity in Expectations and Monetary Policy - joint with Lucas Radke
(Best Paper Award 2nd Conference on Behavioral Research in Finance, Governance, and Accounting, 2020)
We show within a New Keynesian model with overlapping generations that experience-based heterogeneity in expectations across age groups impairs monetary policy’s transmission on inflation via expectations. In our model agents only use lifetime observations to forecast macroeconomic variables like inflation or output. A variation in the age distribution has a composition effect on aggregate expectations, which are a size-weighted average over cohort-specific expectations. We show that an increase in the share of old individuals implies an increase in the transmission of monetary policy on inflation but attenuates its stabilisation trade-off under supply shocks via the composition effect.
Risky Financial Collateral, Firm Heterogeneity, and the Impact of Eligibility Requirements - joint with Matthias Kaldorf
(Blog post on the World Bank Blog; Policy Brief for ECONtribute)
How does the eligibility of corporate sector assets as collateral affect collateral supply and risk-taking by the corporate sector? Since banks are willing to pay collateral premia on eligible assets, this makes debt financing cheaper for all firms satisfying eligibility requirements, which are best thought of minimum ratings. We provide a novel analytical characterization of heterogeneous firm responses to collateral easing, i.e., relaxing eligibility requirements. While high-quality firms respond by increasing their debt issuance, some low-quality firms are incentivized to reduce their debt outstanding to benefit from collateral premia. If risk-taking effects are sufficiently large, firm responses increase the resources losses from corporate default. Applying the model to the ECB’s collateral easing policy during the 2008 financial crisis, our results suggest that firm responses introduce a central bank trade-off between collateral supply and resource losses of default. Our analysis suggests that a covenant conditioning eligibility on debt outstanding and current default risk is a powerful instrument to mitigate the adverse impact of collateral premia on default risk while at the same time maintaining a high level of collateral supply.
Macroprudential Regulation of Investment Funds - joint with Giovanni Di Iasio and Christoph Kaufmann
(Covered in Financial Stability Report (01/22) - Banca d'Italia & in Global Financial Stability Report 2022 - International Monetary Fund)
(ECB Working Paper No. 2695)
The investment fund sector, the largest component of the non-bank financial system, is growing rapidly and the economy is becoming more reliant on investment fund financial intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and investment funds. Banks grant loans and issue liquid deposits, which are valuable to households. Funds invest in corporate bonds and may hold liquidity in the form of bank deposits to meet investor redemption requests. Without regulation, funds hold insufficient deposits and must sell bonds when hit by large redemptions. Bond liquidation is costly and eventually reduces investment funds’ intermediation capacity. Even when accounting for side effects due to a reduction of deposits held by households, a macroprudential liquidity requirement improves welfare by reducing bond liquidation and by increasing system’s resilience to financial shocks akin to March 2020.
Policy Work
Monetary policy and banking business - joint work of Monetary Policy Division in Monthly Report of Deutsche Bundesbank, August and November 2023.
Geldpolitik und Klimawandel - joint with Matthias Kaldorf, Michael Krause, and Lucas Radke in Kölner Impulse zur Wirtschaftspolitik 03/2022 und in Wirtschaftsdienst 102(7), pp. 461-467.
The performance and resilience of green finance instruments: ESG funds and green bonds - joint with Marco Belloni, Margherita Giuzio, Simon Kördel, Petya Radulova, and Dilyara Salakhova in Financial Stability Review, November 2020.
(Covered in BIS Quarterly Review, September 2021)