Working papers

A Macro-Financial Model of Monetary Policies with Leveraged Intermediaries (joint with Matthieu Darracq Pariès, European Central Bank)

This article presents a macro-financial model in which the balance sheet of leveraged intermediaries plays the key role in the transmission of monetary policies. We introduce frictions in an inter-bank money market to create a role for central bank reserves as the ultimate mean of settlement in a standard intermediary-asset pricing model. This simple addition produces a unifying theory rationalizing simultaneously how (i) heightened frictions in the money market affect asset prices and the supply of credit (ii) conventional monetary policy is implemented by varying the supply of excess reserves and (iii) unconventional monetary policy can ease a decline in asset prices by extracting liquidity risk during a liquidity crisis.

When Short Drives Long: Endogenous Risk, Innovation, and Hysteresis (joint with Adrien d’Avernas, Stockholm School of Economics)

We propose a transmission mechanism from financial cycles to aggregate productivity growth.  We provide a structural macroeconomic model with heterogeneous risk aversion and endogenous productivity growth in which the financial sector is key in screening and absorbing innovation risk.  Shocks to innovation levels and volatility generate financial cycles. During financial stresses, the financial sector becomes undercapitalized and reduces its  exposure  to  innovation  risk.   As  a  consequence,  willingness  to  take  risk  in  the economy is reduced, and less innovation occurs.  Using a large database on the U.S. financial sector from 1973 to 2014, we show that the combination of undercapitalization and heightened uncertainty generate large time-varying risk premia, safe asset shortage,  and  hysteresis  in  productivity  growth  following financial  crises  that  are quantitatively consistent with empirical observations.  We derive macro-prudential policy implications of the arising trade-off between short-run growth and financial stability.

Financial Crisis and Depressed Restructuring: a Tale of Zombies, Shadows, and Banks 

Financial crisis have been shown to affect the dynamics of firm and productivity growth. A popular explanation of the relationship is the zombie lending hypothesis. Whenever banks are hit by large shocks, they start to misdirect funding from potential efficient entrant (the shadows) to inefficient incumbent (the zombies) thereby decreasing the rate of productivity growth. In this work we develop a model with heterogenous firms and financial intermediaries describing the whole cycle from the build up of instability to the slow recovery. In the model, undercapitalized banks slow down the pace of capital restructuration in order not to update the book value of their assets and therefore not increase their own cost of funding. The effect is magnified as low expected returns decrease asset prices and net worth of banks which feedbacks into lower innovation investment. The model generates testable predictions in the joint distribution of firms and intermediaries balance sheet positions.

A Solution Method for Continuous-Time General Equilibrium Models (joint with Adrien d’Avernas, Stockholm School of Economics)

We propose a robust method for solving a wide class of continuous-time dynamic general equilibrium models. We rely on a finite-difference scheme to solve systems of partial differential equations with several endogenous state variables. This class of models includes the frameworks (among others) of He and Krishnamurthy (2013); Silva (2015); Brunnermeier and Sannikov (2014); and Di Tella (2016).