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)
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)