Current Working Papers
"Dynamic Bank Capital Regulation in the Presence of Shadow Banks", Review of Economic Dynamics (2023)
Links to SSRN version and replication codes.
Abstract: Regulated banks expand relative to shadow banks in recessions and when credit spreads are high, while regulated banks shrink relative to shadow banks in expansions and when credit spreads are low. Motivated by these facts, I build a quantitative general equilibrium model with endogenous risk taking to study how competitive interactions between regulated banks and shadow banks affect optimal dynamic capital requirements. Limited liability and deposit insurance can lead regulated banks to provide socially inefficient risky loans when the returns on safer loans decline. Competition for scarcer funding can further lower the net returns on safe loans, making it more attractive for regulated banks to exploit the shield of limited liability with risky loans. Higher capital requirements can reduce inefficient risk at the cost of lower liquidity provision and some migration of credit from regulated banks to shadow banks. Accounting for the interactions of regulated and shadow banks can change the magnitude and direction of the optimal response of capital requirements to shocks that drive the business cycle. Moreover, Basel-III style rules that differentiate between the type of bank loans are much better at mimicking the Ramsey optimal capital requirements than standard rules that aggregate loans. The performance of such dynamic rules can be further improved once they are combined with a small static capital buffer.
"A Static Capital Buffer is Hard To Beat", February 2024
(joint with Matthew Canzoneri, Behzad Diba, and Luca Guerrieri)
Link to the latest draft and download replication codes.
Abstract: In a model with endogenous risk taking, deposit insurance and limited liability may lead banks to make risky loans that are socially inefficient. Capital requirements can prevent excessive risk taking at the cost of reducing liquidity-producing bank deposits. The all-knowing Ramsey planner will set capital requirements pro-, counter-, or a-cyclically depending on the origin of each shock. However, the Ramsey response to a constellation of shocks is not implementable. Simple rules that respond to cyclical conditions—in line with Basel III guidance—perform poorly, whereas a small, static capital buffer does nearly as well as the optimal Ramsey policy.
Older, but not forgotten
"Social Value of Public Information under Asymmetric Precision of Private Signals: Implications for Capital Flows"
Link to presentation, model's description and codes PDF
Abstract: I extend the model of Morris and Shin (M&S, AER 2002), which features a game with continuous actions, strategic complementarity, and dispersed information, to include two types of agents that choose two actions for two fundamentals. Private signals about one fundamental are equally precise across agents, while the precision of private signals about another fundamental depends on the agent’s type. The theoretical results show that a higher relative dispersion of private signals (asymmetry) weakens the threshold for the precision of the public information (proposed by M&S) to be beneficial to welfare. Moreover, the share of information content about fundamentals in the public signal is a more important determinant of welfare than a strategic complementarity parameter. I characterize countries by their ability to generate precise information about their economic outcomes, such that advanced economies can generate more precise signals about the state of their economies compared with emerging market economies (EMEs). I link the public signal to the VIX (implied volatility index) and relate the private signals to the investor-specific knowledge about fundamentals. The results of the theoretical model support the concerns of policymakers about excessive nature of capital inflows to EMEs.
"Exchange Rate Considerations for Inflation Targeting Policies in Resource-Rich Countries"
Abstract: The paper develops a theoretical model of an open economy to examine the role of the exchange rate for conducting inflation targeting policy. The model does not confirm the hypothesis of optimality in meeting the inflation target only. The relative importance of the exchange rate in the policy function and the parameter that characterizes the pass-through effect of the exchange rate on inflation determine the conditions under which the central bank becomes constraint in stabilizing inflation. On the empirical side, the paper presents a vector error-correction model estimated on Russian monthly data 2002:1 – 2013:4 to study long-run (cointegrated) relationships between inflation, output, exchange rate, real interest rate, and foreign reserves. I find that depreciation/appreciation of the nominal effective exchange rate by 1% leads to an increase/decrease in inflation by 0.44%. I provide evidence that a long-lasting importance of the exchange rate in policy objectives was the main factor that prevented the Central Bank of Russia to attain its stated inflation target.