"Tail interdependencies and liquidity-at-risk in euro area sovereign bond markets", joint with D. Clancy (ESM) and P. G. Dunne (Central Bank of Ireland)
Available as European Stability Mechanism working paper here
Avaiable as Central Bank of Ireland working paper here
VoXEU summary here
Abstract: The likelihood of severe contractions in an asset’s liquidity can feed back to the ex-ante risks faced by the individual providers of such liquidity. These self-reinforcing effects can spread to other assets through informational externalities and hedging relations. We explore whether such interdependencies play a role in amplifying tensions in European sovereign bond markets and are a source of cross-market spillovers. Using high frequency data from the inter-dealer market, we find significant own- and cross-market effects that amplify liquidity contractions in the Italian and Spanish bond markets during times of heightened risk. The German Bund’s safe-haven status exacerbates these amplification effects. We provide evidence of a post-crisis dampening of cross-market effects following crisisera changes to euro area policies and institutional architecture. We identify a structural break in Italy’s cross-market conditional correlation during rising political tensions in 2018, which significantly reduced liquidity. Overall, our findings demonstrate potential for the provision of liquidity across sovereign markets to be vulnerable to sudden fractures, with possible implications for euro area economic and financial stability.
"Optimal monetary-fiscal policy in the euro area liquidity crisis", Journal of Macroeconomics, Vol. 70, December 2021 link
Presentation at the GCER conference (Washington DC, May 2019) here
Abstract: We build an euro-area level DSGE model featuring a liquidity shock in the sovereign bonds market to simulate the strong contraction in economic activity observed during the 2008-2009 crisis. In the model, a sudden deterioration of the liquidity property of sovereign bonds is associated with deep recession and deflation. Against this background we characterize optimal monetary and fiscal policy with full commitment. We find that the optimal policy contains three features: (i) the policy rate is lowered until hitting the zero lower bound (ZLB) and then is kept at the ZLB for more periods; (ii) a prolonged central bank’s balance-sheet expansion aimed at restoring the liquidity deteriorated; (iii) a counter-cyclical fiscal stimulus which offsets, to a large extent, the fall in private spending caused by the liquidity shock. Policy regimes involving (i), but not (ii) and (iii), are quite weak in stabilizing output gap and inflation. Monetary policy regimes such as full inflation-targeting or nominal GDP targeting perform remarkably well insofar as they are complemented with an optimally implemented counter-cyclical fiscal policy. Our results tend to favour the view that, in case of recession, an euro-wide coordinated fiscal policy should supplement the role of the ECB in achieving its primary objective.
"Macroprudential cap on debt-to-income ratio and monetary policy rules", Central European Journal of Economic Modelling and Econometrics, 2022, vol. 14, issue 2, 161-198
Abstract: We consider a monetary DSGE model featuring a borrowing constraint such that the amount of debt cannot be larger than a fraction - the debt-to-income (DTI) limit - of borrowers’ labor income, and the DTI limit is endogenous. The coexistence of financial amplification mechanisms envisaged by this model provides a scope for a specific macroprudential tool: a countercyclical DTI limit. Conditional on the pre-crisis sample our normative analysis shows that, when this policy is implemented, the cooperation between central bank and macroprudential authority in pursuing the “two instruments for two goals” strategy delivers an efficient performance in terms of macroeconomic stabilization, largely outperforming the central bank’s policy of “leaning against the wind”. This implies that a central bank should only be focused on its standard objectives (inflation and output stabilization) while financial stability be monitored by the macroprudential authority.
"On the Asymmetric Effect of Monetary Policy Announcements on Stock Returns", Rivista Bancaria 2-3, 2016
Abstract: By means of an event-study I investigate the effect of announcements of monetary policy actions on stock returns and their conditional variance. I decompose the change in the interest rate instrument of monetary policy (federal funds rate) between expected and unexpected component and then estimate with an EGARCH model the different impact of these on stock returns on announcement days. Main finding is that only the unexpected component (”surprise effect”) significantly affects stock returns, as advocated by the ”efficiency market hypothesis”. The ”surprise effect” reports negative sign, implying that unexpected reductions of the policy rate are associated to increase in stock returns and their variance.