- Systemic Loops and Liquidity Regulation (2016), with Ester Faia (Goethe University Frankfurt). Journal of Financial Stability, vol 27, pp 1-16. Also CEPR DP10918. Online Appendix.
Abstract: Banks are typically exposed to spirals between liquidity scarcity and solvency risk. We build a network model of optimizing banks featuring contagion on both sides of balance sheets: runs on short term liabilities and banks’ liquidity hoarding induce liquidity freezes; fire sale externalities and interconnected debt defaults produce asset risk. We use the model, which is calibrated to European data via simulated method of moments, to study the effects of phase-in increases of liquidity coverage ratios. Interestingly we find that the systemic risk profile of the system is not improved and might even deteriorate. Based on those insights we propose an alternative approach: differential (across banks) application of coverage ratios based on a systemic importance ranking help to mitigate the externalities and deliver a much more stable system.
- Input-Output-based measures of systemic importance (2014), with Ignazio Angeloni (ECB & Bruegel). Quantitative Finance, 15:4, 589-606. (Also SAFE WP 29).
Abstract: The analyses of intersectoral linkages of Leontief (1941) and Hirschman (1958) provide a natural way to study the transmission of risk among interconnected banks and to measure their systemic importance. In this paper we show how elements from classic input-output analysis can be applied to banking and how to derive six indicators that capture different aspects of systemic importance, using a simple numerical example for illustration. We also discuss the relationship with other approaches, most notably network centrality measures, both formally and by means of a simulated network.
- Less aid proliferation and more donor coordination? The wide gap between words and deeds (2010), with Peter Nunnenkamp & Rainer Thiele (both Kiel Institute for the World Economy). Journal of International Development, Vol 22, pp 920-940, Oct. 2010. (Also Kiel Institute WP 1516).
Abstract: We present a two-step approach of assessing whether major donors of foreign aid have met recent demands for less proliferated and better coordinated aid efforts. First, we calculate Theil indices revealing the concentration of each donor’s aid on recipient countries and specific aid sectors. Second, we map overlaps of aid from different donors and over time to analyze the degree of coordination. Our results point to a wide and persistent gap between the rhetoric of political declarations and the donors’ actual aid allocation during the period 1995–2006. Few donors have specialized on a limited set of recipients and aid sectors, and coordination has remained elusive.
Other Working Papers / In Progress / Policy Work
- Bank networks: contagion, systemic risk and prudential policy (2015), with Domenico Delli Gatti (Università Cattolica del Sacro Cuore, Milano) & Ester Faia (Goethe University Frankfurt, CFS & SAFE). CEPR DP10540, CESifo WP 5182, SAFE WP 87.
Abstract: We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a coreperiphery structure, dis-assortative behavior and low density. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.
- Multiplex interbank networks and systemic importance – An application to European data (2015), with Iván Alves (ECB). SAFE WP 102.
Abstract: Research on interbank networks and systemic importance is starting to recognise that the web of exposures linking banks balance sheets is more complex than the single-layer-of-exposure paradigm. We use data on exposures between large European banks broken down by both maturity and instrument type to characterise the main features of the multiplex structure of the network of large European banks. This multiplex network presents positive correlated multiplexity and a high similarity between layers, stemming both from standard similarity analyses as well as a core-periphery analyses of the different layers. We propose measures of systemic importance that fit the case in which banks are connected through an arbitrary number of layers (be it by instrument, maturity or a combination of both). Such measures allow for a decomposition of the global systemic importance index for any bank into the contributions of each of the sub-networks, providing a useful tool for banking regulators and supervisors. We use the dataset of exposures between large European banks to illustrate the proposed measures.
- Bank loans, external financing and economic activity in the euro area (coming soon), with Robert Unger (Deutsche Bundesbank).
- Real effects of CDS (coming soon), with Andreas Barth (Goethe University Frankfurt).
- Macroprudential policy and spillovers within the Euro Area: A GVAR approach (2012).
Abstract: In the wake of the recent financial crisis, there seems to be a growing consensus that the achievement of macroeconomic stability in terms of low output volatility and inflation is not enough and more attention should be paid to financial stability. In this context macroprudential regulation appears as a crucial element in a reformed paradigm for policy. The present study contributes to the relatively scarce empirical literature on the subject by investigating the effects and spillovers of one of the central instruments discussed in the macroprudential literature, namely the Countercyclical Capital Buffer. A GVAR approach is employed to investigate the effects of changes in a proxy of this variable (banks’ “capital ratio”) within the Euro Area. In our model, changes in the capital ratio force monetary policy to react, though the normal interplay between inflation, GDP and the monetary policy interest rate does not seem to be affected. A different picture arises when looking at loans, which are considerably affected by changes in the capital ratio. The findings presented suggest that monetary policy would need to take into account macroprudential policies and their effects as part of its decision-making process. Financial linkages across countries do play an important role for spillovers across the Euro Area when adjustments to the capital ratio take place.
- Vertical fiscal imbalances and the accumulation of government debt (2014), with Mike Seiferling (IMF). IMF WP 14/209. Also SAFE WP 61.
Abstract: Delegating fiscal decision making power to sub-national governments has been an area of interest for both academics and policymakers given the expectation that it may lead to better and more efficient provision of public goods and services. Decentralization has, however, often occurred on the expenditure and less on the revenue side, creating “vertical fiscal imbalances” where sub-national governments’ expenditures are not financed through their own revenues. The mismatch between own revenues and expenditures may have consequences for public finance performance. This study constructs a large sample of general and subnational level fiscal data beginning in 1980 from the IMF’s Government Finance Statistics Yearbook. Extending the literature to the balance sheet approach, this paper examines the effects of vertical fiscal imbalances on government debt. The results indicate that vertical fiscal imbalances are relevant in explaining government debt accumulation suggesting a degree of caution when promoting fiscal decentralization. This paper also underlines the role of data covering the general government and its subsectors for comprehensive analysis of fiscal performance.
- The Fiscal Compact and Government Debt: One Law, Multiple Statistics (2014), with Ester Faia (Goethe University Frankfurt, CFS & SAFE). SAFE Policy Letter nº22 (March 2014).