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 where leveraged intermediaries play the key role in the transmission of monetary policies. Liquidity frictions in the money markets prevent the payment system to clear every transaction with certainty and therefore creates a role for central bank reserves as the ultimate mean of settlement. By manipulating both supply and interest paid on reserves, the central bank impacts the short term money market rates as well as the liquidity risk taken by these leveraged
intermediaries. The model is able reproduce and rationalize a series of stylized facts observed during the crisis and the recovery that traditional DSGE are not capturing: (i) a strong correlation between money market stresses and credit spreads (ii) a spiraling doom loop between funding and market liquidity wiping out bank capital (iii) the multiplicity of central liquidity facilities meant at alleviating wide funding needs.
When Short Drives Long: Endogenous Risk, Innovation, and Hysteresis (joint with Adrien d’Avernas, Stockholm School of Economics)
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)