"All models are wrong, but some are useful."

George Box

Academic publications

 

 

Working papers

 

 

Occasional papers

 

 

 Work in progress


System-wide Dividend Restrictions: Evidence and Theory, (with Miguel Ampudia, Frank Smets and Alejandro Van der Ghote), August 2023, BIS Working Paper Series

Previous version circulated in the CEPR Discussion Paper Series (18467).

Abstract: We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks' capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.

Corporate and Bank Exposures to Climate Risks: Stylized Facts, (with Tina Emambakhsh, Jose-Luis Peydro and Carmelo Salleo ), September 2023, ECB Working Paper Series, forthcoming

Abstract: We present novel empirical evidence on corporate and bank exposures to transition and physical risks based on a highly granular dataset that combines climate information of 2.3 Mn European corporates with data on loan exposures to corporates of 1,600 banks, covering 80% of euro area bank corporate loan exposures: (i) corporate carbon emission intensity is mainly represented by Scope 3 emissions, depends on the size of the firm and varies significantly across economic sectors but not across countries; (ii) corporate exposures to physical risk depend on geolocation and on the exposure to each hazard type, thus, greatly varying across countries but not necessarily across sectors; (iii) firms exposed to high transition and physical risks are generally those that face restrictions in choosing their geolocation and are resource intensive; (iv) systemic banks account for the bulk of absolute bank exposures to climate risks but non-systemic banks are relatively more exposed to such risks; (v)  bank exposures to transition risk do not significantly vary across countries and are concentrated in very few banks and countries; and (vi) bank exposures to physical risks depend on geolocation and are concentrated in specific natural hazard types and countries. We illustrate some of the many uses of this dataset by introducing the ECB economy-wide climate stress test and by studying the bank corporate loan pricing of climate risks.

Public Money as a Store of Value, Heterogeneous Beliefs and Banks: Implications of CBDC, (with Oscar Soons), March 2023, Submitted to a Journal 

Previous version circulated in the ECB Working Paper Series (2801). 

Abstract: The bulk of cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty and only a fraction of the population choosing to hold cash to that end. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Consumers who are sufficiently pessimistic about bank stability prefer to hold cash. By lowering the cost of storing public money, the introduction of a central bank digital currency (CBDC) can increase social welfare despite partial bank disintermediation and does increase relative maturity transformation by letting banks re-balance their portfolio towards more lending as the average depositor becomes more optimistic about bank stability. These findings challenge the common wisdom that the use of CBDC as a store of value should be discouraged to avoid disintermediation.

Selected Media Coverage and Policy Notes:

VoxEU (CEPR Policy Portal):  Central bank digital currency and heterogeneous beliefs about bank stability: The role of public money as a store of value , July 2023.

International Banker: Central bank digital currency as a store of value and banks, December 2023.

The Optimal Quantity of CBDC in a Bank-based Economy, (with Lorenzo Burlon and Frank Smets), May 2023, American Economic Journal: Macroeconomics, forthcoming

Previous versions circulated in the ECB Working Paper Series (2689) and  CEPR Discussion Paper Series.

Abstract: We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offs and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such "stabilization effect" improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare - maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. 

Selected Media Coverage and Policy Notes:

VoxEU (CEPR Policy Portal): The optimal amount of Central Bank Digital Currency in circulation, August 2022.

SUERF Policy Notes: The optimal quantity of CBDC in the euro area, August 2022.

NEP-DEG Blog: The optimal quantity of CBDC in a bank-based economy,  October 2022.

Nada es Gratis: La cantidad óptima de moneda digital de banco central (CBDC) en circulación, October 2022. 

Seminar Presentation by Frank Smets at CefES - JRC (European Commission): See the video here.

Speech by F. Panetta (ECB): More than an intellectual game: exploring the monetary policy and financial stability implications of central bank digital currencies

Featured in CoinDesk and Bitcoin.com 

Macroprudential Policy and the Role of Institutional Investors in Housing Markets, (with Frank Smets),  August 2022, Submitted to a Journal.

Circulated in the (ESRB Working Papers 137 and CEPR Discussion Papers 17479). 

Abstract:  Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment firms leverage large-scale buy-to-rent real estate investments that enable them to set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation.

Previous version circulated in the Working Paper Series of the ECB (2020).

Selected Media Coverage and Policy Notes:

SUERF Policy Notes: Macroprudential policy and real estate funds, February 2023.

International Banker: Macroprudential policy and real estate funds, February 2023.

SUERF Workshop: Housing in the 2020s: valuation, drivers, risks and policies, September 2022.

VoxEU (CEPR Policy Portal): Institutional real estate investors, leverage, and macroprudential regulation, November 2020.

Central Banking: LTV ratios need reform, ECB paper argues,  August 2020.

Rethinking Capital Regulation: the Case for a Dividend Prudential Target, September 2021  (International Journal of Central Banking, vol. 17(3), pages 271-336).

 Abstract: Recent empirical studies have documented two remarkable patterns shown by euro area banks in the aftermath of the Great Recession: (i) their tendency to boost capital ratios by shrinking assets (contraction of loans supply), and (ii) their reluctance to cut back on dividends (fall in retained earnings). First, I provide evidence of a potential link between these two trends. When shocks hit their profits, banks tend to adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then I develop a DSGE model that incorporates this mechanism to study the transmission and effects of a novel macroprudential policy rule - that I shall call Dividend Prudential Target (DPT) - aimed at complementing existing capital regulation by tackling this issue. Welfare-maximizing DPTs are effective (more than the CCyB) in smoothing the financial and the business cycle (by means of less volatile retained earnings) and induce significant welfare gains associated to a Basel III-type of capital regulation through various channels. 

Online Appendix

Previous versions circulated in the Working Paper Series of the CNMV (2018), ESRB (2019) and ECB (2020)

Selected Media Coverage and Policy Notes:

VoxEU (CEPR Policy Portal): Macroprudential policy and  COVID-19: Restrict dividend distributions to significantly improve the effectiveness of the CCyB release, July 2020.

Nada es Gratis: Política Macroprudencial y COVID-19: restringir la distribución de dividendos para mejorar la efectividad de la regulación de capital contracíclica, August 2020.

Central Banking: Dividends should be subject to macropru limits - ECB Paper, July 2020.

NEP-DEG Blog: Rethinking Capital Regulation: the Case for a Dividend Prudential Target,  August 2019.

SUERF Policy Notes: Rethinking Capital Regulation: the Case for a Dividend Prudential Target in the Euro Area, July 2019.

A Framework for Macroeconomic Cost-Benefit Analysis of Financial Regulation: a Growth-at-Risk Perspective (with Katarzyna Budnik and Carmelo Salleo), June 2020 (available upon request).

Abstract: We develop a quantitative framework to carry out cost-benefit analysis of financial regulations (CBA/FR) in three steps: (i) model selection (to describe the economy), (ii) estimation of macroeconomic costs and benefits of financial legislation based on a set of metrics that capture the regulatory-induced shifts of certain moments and quantile-based statistics of the predicted conditional distribution of GDP growth (e.g., Growth-at-Risk and Expected Shortfall), and (iii) ranking of regulatory alternatives to select one of them by means of a decision rule that is consistent with the final objectives defined in the policy process. The framework is well suited to produce CBA/FR that: (i) tracks the net benefits of financial reforms over different horizons, (ii) provides estimates of various regulatory costs and benefits under a single methodology and expressed in the same units (which allows to easily monetize them), (iii) identifies key aspects of financial regulations such as their non-linearities, second round effects, transmission mechanisms, and heterogeneous individual reactions, and (iv) informs about the linkages between instruments, intermediate objectives and policy targets. The merits of the methodology are illustrated with an application on bank capital reforms.