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Published/Forthcoming Papers (links are to working paper versions)

Link to Economist Article about the paper

(Financial System Risk and Flight to Quality (joint with R. Caballero) [OLDER VERSION, WITH DYNAMIC MODEL] )

                Link to Bernanke, et al, G20 speech and paper that cites this paper. Link

FINANCIAL SECTOR LEVERAGE DATA: Our model predicts that leverage of the financial sector rises during crises, rather than falls as would be consistent with a deleveraging model.  This short note explains why this happens in our model and presents empirical evidence that proves the data is consistent with the model. It also explains the empirical deleveraging pattern that other models have focused on. 

Link to Economist Article about the paper

Short-term Debt and Financial Crises: What we can learn from U.S. Treasury Supply (joing with A. Vissing-Jorgensen)  

We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the non-financial sector. Households' demand for safe and liquid assets drives a premium on such assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against these assets. The central prediction of the theory is that government debt should be a substitute for the net supply of privately issued short-term debt. We verify this prediction with data from 1914 to 2011 by showing the net supply of government debt, predominantly Treasuries, is strongly negatively correlated with the net supply of private short-term debt, defined to be the private supply of short-term safe and liquid debt, net of the financial sector's holdings of Treasuries (and reserves and currency). A second set of predictions of the model concern the quantity of money (i.e. liquid bank liabilities such as checking accounts). The theory predicts that when government supply is large, banks should hold more of the supply and use it to back issuance of more liquid bank liabilities. We confirm this prediction as well. Moreover, we show that accounting for the impact of Treasury supply on bank money results in a stable estimate for money demand and can help resolve the "missing money" puzzle of the post-1980 period. Finally, the theory predicts that the quantity of short-term debt issued by the financial sector should predict financial crises better than standard measures such as private credit/GDP. We also confirm this prediction.


A Macroeconomic Framework for Quantifying Systemic Risk (joint with Z. He)

(Winter of 2012 Swiss Finance Institute Outstanding Paper Award)

Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model's solution is a stochastic steady state in which only some of the states correspond to systemic risk states. This model allows us to examine the transition from ``normal" states to systemic risk states. We calibrate our model and use itto match the systemic risk apparent during the 2007/2008 financial crisis.


ECB Policies involving Government Bond Purchases: Impact and Channels (joint with Stefan Nagel and Annette Vissing-Jorgensen)

We evaluate three ECB policies involving government bond purchases, the Securities Market Programme (SMP), the Outright Monetary Transactions (OMT), and the 3-year Long-Term Refinancing Operation (LTRO) using an event-study approach.  We find that the policies reduced sovereign bond yields through two main channels.  The primary channel is a reduction in default risk. The second channel is through a market segmentation effect.  We reach these conclusions by examining the dynamics of a collection of asset prices, including euro-denominated sovereign bond yields, dollar-denominated sovereign bond yields, corporate bond yields,; and credit default swap rates.  The behavior of the spreads between different combinations of these asset prices reveals the channels at work.  ECB policies aimed at reducing government bond yields also have beneficial macroeconomic spillovers. We show this by documenting increases in private asset values in both distressed and core countries.


Measuring Liquidity Mismatch in the Banking Sector (joint with Jennie Bai and Charlies-Henri Weymuller)

This paper implements a liquidity measure proposed by Brunnermeier, Gorton and Krishnamurthy (2011), "the Liquidity Mismatch Index (LMI)," to measure the mismatch between the market liquidity of assets and the funding liquidity of liabilities. The LMI measure weights each asset and liability by contract- and time-varying weights which measure the liquidity of the contract. Using bank regulatory report and repo transaction data, we construct the LMI for 2870 bank holding companies during 2002 - 2013 and investigate its time-series and cross-sectional patterns. The LMI can be aggregated across firms to measure the aggregate liquidity shortfall in the U.S. banking sector.  We find that the aggregate banking sector LMI worsens from around [negative] $2 trillion in 2004 to $4.5 trillion in 2008, before reversing back to $2 trillion in 2009.  In the cross section, we find that banks with more liquidity mismatch (i) experience more negative stock returns during the crisis, and more positive stock returns pre-crisis, and (ii) experience more negative stock returns on events corresponding to a liquidity run, and more positive stock returns on events corresponding to liquidity provision by the government. We demonstrate the LMI can serve as an effective tool in liquidity stress tests. 



Light Reading:


Older Papers:

Fiscal Policy and Financial Depth (joint with R. Caballero)

Liquidity Illusion: On the Risks of Sterilization(joint with R. Caballero)

International Liquidity Management: Sterilization Policy in Illiquid Financial Markets(joint with R. Caballero)

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Last Revised: August 25, 2013