Research

Convenience Yields in Euros: Investment Mandates and Conditional QE

I document novel puzzles in convenience yields in euros: when governments borrow through entities that are not formally sovereigns (such as supranationals) they all pay a common interest rate regardless of default risk or liquidity. This rate is significantly higher than for sovereign debt and more exposed to expectations about monetary policy. I develop a model consistent with these facts by exploring the role of investment mandates that reduce the size of potential investors in supranationals relative to equally safe governments. The smaller size of potential buyers translates into lower expected liquidity during crises such that even risk-neutral investors require a premium to hold supranationals. Expectations about asset purchases during crises, which I call conditional QE, can significantly compress this premium even if they are not targeted. 

Fiscal integration as a Pareto improvement

I study the effect of partial fiscal integration for sovereign countries that are members of a single currency area. I make three contributions to the existing literature. First, in addition to joint issuance of debt securities, I consider an element of (partial) joint taxation that is costly to default on and hence provides an implicit commitment device for weaker countries. Second, I focus on the welfare gains for stronger countries thanks to the reduced moral hazard due to the costs imposed on them by default of a weak country. Finally, I incorporate the empirical evidence from Bonfanti (2024) to take into account the high cost of issuance of securities that are not formally government bonds.

Do financial markets consider European common debt a safe asset? (with Luis Garicano)

Bruegel blog, December 2022

"Workshop on EU borrowing costs: drivers and dynamics", European Parliament, Brussels

Here are the details of the event, my slides and a recording of my testimony