Economic analysis and research

We build a structural model of yield curves in a monetary union where the central bank’s bond purchases affect the probability of peripheral default. A euro area calibration shows that asset purchases affect peripheral yields mainly through “default risk extraction”, whereby purchases reduce both the amount of sovereign risk that the market must absorb, and the probability of sovereign default. Counterfactual simulations show that the PEPP’s flexibility enhanced its effectiveness, contributing approximately 15bp to the overall 80bp impact of the initial PEPP announcement on Italian yields, without changing German yields. Flexibility could again prove valuable in future ECB asset purchase programs, if the smooth transmission of monetary policy to all euro area countries is compromised by unwarranted fragmentation.

We document the consequences of losing a job across countries using a harmonized research design and administrative data from Social Security. Workers in Denmark and Sweden experience the lowest earnings declines following job displacement, while workers in Italy, Spain, and Portugal experience losses three times as high. French and Austrian workers face earnings losses somewhere in between. Key to these differences is that Southern European workers are less likely to find employment following displacement. The transition to worse-paying jobs after job displacement explains a substantial portion of wage losses in all countries, around 50% or more in most countries.

I develop a macro model of the U.S. housing finance system that delivers an equilibrium connection between the securitization and mortgage credit markets. An endogenous securitization market efficiently reallocates illiquid assets, increases liquidity to fund mortgage lending, and lowers interest rates for borrowers. However, its benefits are hindered by originators’ private information about loan quality which leads to adverse selection in securitization. Fluctuations in household credit risk induce expansion and contractions of mortgage credit through the securitization liquidity channel. Adverse selection generates a multiplier effect of household shocks. Applying the theory to the Great Financial Crisis, I quantify that information frictions amplified the observed mortgage credit contraction by a factor of 1.5. The multiplier is an endogenous function of the severity of information frictions. A subsidy policy in the securitization market can stabilize liquidity and credit cycles.

In this paper, we build a novel dataset with 135 million pricing quotes from 11 euro area countries (including the largest ones), representing about 60% of the euro area consumption basket, to document various facts regarding price rigidity in the low inflation period from 2010 to 2019. We find that prices are sticky, with 12.3% of prices changing every month on average (8.5% when excluding sales), and a median price increase (respectively, decrease) of 9.6% (respectively, 13%). There are small differences between countries, and larger differences across sectors. Although neither frequency nor size exhibit significant time trends, we find that the latter is a much more important contributor to the overall inflation dynamics. Moreover, firms respond to aggregate supply and demand shocks by changing the size of their price adjustments but not the frequency.

How does a shock in a specific sector propagate along the global production network? What is the aggregate impact when a common shock affects simultaneously the same industry across different countries? In this work we provide a useful framework to account for several policy-relevant scenarios, such as changes in environmental regulations or the implementation of new technologies. For that purpose, we highlight the importance of departing from standard linear models that assume perfect input substitution (i.e. unitary elasticity). We combine a theoretical framework of production networks with arbitrary elasticities of substitution (Baqaee & Farhi, 2019) and we make use of World Input-Output Database (WIOD) to account for international linkages. This setting illustrates how, in the presence of production input complementarities, the interaction between simultaneous sector-specific shocks has significant non-linear effects on sectoral composition and aggregate output. The aggregate impact of negative (positive) shocks gets significantly amplified (mitigated) when they affect simultaneously industries with strong production linkages. Our results show that ignoring production complementarities leads to vastly underestimating the aggregate consequences of regulatory or technological shocks in industries like chemicals or vehicle manufacturing. In contrast, simultaneous shocks to services industries are well accounted for by standard measures.

Imperfect information aggregation in secondary markets of credit has significant consequences for economic cycles. As banks put more weight on mark-to-market gains, they find it optimal to refrain from revealing information about adverse shocks. Consequently, default risk is mispriced, and loan volumes, and thus investment, are not appropriately reduced. Overinvesment lowers the price of capital, leading households to increase consumption without decreasing labour supply, generating a boom. Due to mispricing, banks subsequently face bigger losses and capital depletion. Output then decreases sharply due to credit supply shortages. These instances of market dysfunction are crucial in amplifying credit cycles.

The paper studies how labor market duality affects human capital accumulation and the wage trajectories of young workers in Spain. Using rich administrative data, we follow workers from their entry into the labor market to measure the experience accumulated under different contractual arrangements and we estimate their wage returns. We document lower returns on experience accumulated under fixed-term contracts (FTCs) compared with open-ended contracts and show that this gap in returns is due to lower human capital accumulation while working under FTCs. This gap widens with worker skill, suggesting that experience and skill-learning are complementary. The widespread use of FTCs holds back wage growth by up to 16 percentage points after 15 years since labor market entry. 

In this study we disentangle the effect of roots from other confounding factors, including discrimination, to explain differences in immigrants’ outcomes in the mortgage market. Using loan-level data from the Spanish Credit Register complemented with data on securitized mortgages over a complete financial cycle, we identify that foreign-born borrowers with feeble roots to the host country pay higher mortgage rates at origination than similar debtors that are better-settled. We also find that weak roots are associated with higher default rates and with greater incentives to go into default in negative equity situations. Overall, we show that rootedness explains differential loan conditions at origination and default behavior in mortgages. From a policy perspective, our results have important implications for the identification of discriminatory lending practices, for understanding the potential consequences of moving away from recourse mortgage regimes, and for the effectiveness of macroprudential policy.

The negotiation period following the 2016 Brexit referendum was characterized by high uncertainty regarding the new framework for bilateral relations between the European Union and the United Kingdom. In this context, an important fraction of Spanish trade with the United Kingdom was diverted to alternative markets after the referendum, in the case of those firms with a high exposure to the UK (above 10 % of foreign sales and purchases). Trade diversion was higher for exports (than for imports) and to/from EU countries.

Does expansionary monetary policy foster capital misallocation? In a recent study we tackle this question both theoretically and empirically. We show how unexpected monetary policy expansions increase the investment of high-productivity firms relatively more than that of low-productivity ones, decreasing capital misallocation and increasing aggregate productivity. This has profound implications for the optimal design of monetary policy.

Unconventional Monetary Policies gained momentum since the global financial crisis and were used extensively throughout the pandemic. An extensive literature has studied their effects on growth, prices and financial variables, but much less is known about their impact on ex-ante tail risk perceptions. Our paper analyses the impact of the unconventional monetary policies of four major central banks (the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan) on the probability of future market crashes. We exploit the heterogeneity of different unconventional actions to disentangle their influence on reducing the ex-ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. We empirically show that the announcement of unconventional policies reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions and a positive effect on the real economy.

We document that overcollateralisation of banks' secured liabilities is positively associated with the risk premium on their unsecured funding. We rationalize this finding in a theoretical model in which costs of asset encumbrance increase collateral haircuts and the endogenous risk of a liquidity-driven bank run. We then test the model's predictions using a novel dataset on asset encumbrance of the European banks. Our empirical analysis demonstrates that banks with more costly asset encumbrance have higher rates of overcollateralisation and rely less on secured debt. Consistent with theory, the effects are stronger for banks that are likely to face higher fire-sales discounts. This evidence acts in favour of the hypothesis that asset encumbrance increases bank risk, although this relationship is rather heterogeneous.