Working papers

Monetary policy and endogenous financial crises [slides] – NEW VERSION,  with F. Collard, J. Gali, and C. Manea
Should a central bank deviate from price stability to promote financial stability? We study this question through the lens of a textbook New Keynesian model augmented with capital accumulation and search-for-yield behaviors that give rise to endogenous financial crises. Our main findings are fourfold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, the central bank can lower the probability of a crisis and increase welfare compared to strict inflation targeting by responding to output and an index of financial fragility (the “yield gap”) in addition to inflation. Third, “backstop” policy rules that prevent credit market collapses can further increase welfare. Fourth, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.

Big techs in finance: on the new nexus between data privacy and competition,  with T. Ehlers, L. Gambacorta, and H-S. Shin
The business model of big techs rests on enabling direct interactions among a large number of users on digital platforms, such as in e-commerce, search and social media. An essential by-product is their large stock of user data, which they use to offer a wide range of services and exploit natural network effects, generating further user activity. Increased user activity completes the circle, as it generates yet more data. Building on the self-reinforcing nature of the data-network-activities loop, some big techs have ventured into financial services, including payments, money management, insurance and lending. The entry of big techs into finance promises efficiency gains and greater financial inclusion. At the same time, it introduces new risks associated with market power and data privacy. The nature of the new trade-off between efficiency and privacy will depend on societal preferences, and will vary across jurisdictions. This increases the need to coordinate policies both at the domestic and
international level.

Ripple effects of monetary policy,  with E. Garcia-Appendini and S. Ongena
We study how monetary policy transmits through the demand and supply of intermediate goods. We document that downstream and upstream corporate financial health are instrumental for the transmission of monetary policy. Changes in monetary conditions have a quantitatively larger impact on firms’ operations through the changes in demand induced by clients’ financial health (demand channel of transmission), and through the changes in supply induced by suppliers’ financial health (cost channel of transmission), than through the firms’ own balance sheets. Our estimates suggest that the cost channel may be more potent than the demand channel of transmission.

Dealing with bank distress: insights from a comprehensive database, with K. Adler
We study the effectiveness of policy tools that deal with bank distress (i.e. central bank lending, asset purchases, bank liability guarantees, impaired asset segregation schemes). We present and draw on a novel database that tracks the use of such tools in 29 countries between 1980 and 2016. To keep “all else” equal, we test whether different policies explain differences in how countries fared through bank distress episodes that feature observationally similar initial macro–financial vulnerabilities.

Macroeconomics of bank capital and liquidity regulations, with F. Collard
A quantitative macro model to study the transmission channels of capital and liquidity regulations, how these regulations interact and  whether they have unintended effects. The paper also offers some guidance as to how capital and liquidity regulations should be coordinated.

Financial imbalances and financial fragility
Financial integration overall improves the allocation of world savings, but also entails capital flows from less financially developed to more financially developed countries. When the latter do not have the capacity to absorb those flows, a financial crisis may break-out, and spread internationally.

Credit chains and the propagation of financial distress
How an adverse liquidity shock may propagate when firms borrow from and lend to each other, in a trade credit chain.  Following the shock, illiquid firms may become insolvent.

Credit rationing, output gap, and business cycles
An early version of a real business cycle model with Kiyotaki and Moore (1997)’s collateral constraint