Research

Working Papers

• The Value of Government Debt with Domestic Arrears
  Given the rising levels of public debt globally, a key question is whether governments will have enough fiscal space to navigate the next crisis. This paper documents the use of non-marketable financial resources by governments in order to affect the valuation of government bonds and, thus, satisfy public financing needs. The paper analyses domestic arrears, i.e. overdue payments by the government to its domestic beneficiaries, as source of non-marketable financing. An unexplored historical dataset from the UK during 1700-1900 compensates for the lack of reliable modern data on arrears. I find that arrears, whose face value averages 4.3 percent of GDP, have a risk-adjusted present value of 12.9 percent of GDP on average. Thus, arrears increase fiscal space, allowing the issuance of more marketable debt. The intuition is that arrears accumulate during bad times and redirect cash flows from suppliers to bondholders: thus, they provide risk-averse bondholders with an insurance-like cash flow that justifies higher bond valuations. The omission of arrears in the valuation of public marketable debt leads to an underestimation of its fundamental value either through mismeasurement of government expenditures (which might be inflated as compensation for suppliers), or due to the disregard of revenues extracted from suppliers via financial repression. The paper contributes to the resolution of recently raised public debt valuation puzzles and provides a new rationale for the emergence of arrears. Finally, a new dataset of outstanding arrears for EU member countries is presented, revealing size and cyclicality akin to the historical UK data.

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• Portfolio Rebalancing Across Assets and Currencies: Evidence from the Global Investment Fund Universe (with Torsten Ehlers (BIS), Mathias Hoffmann (UZH), Boris Hofmann (BIS) and Christian Schmieder (BIS)) [available upon request]
  Using granular data on the global universe of investment funds from 2007 to 2022, we analyze the characteristics of fund portfolio holdings across major asset classes (equity, long-term, and short-term debt) and currencies (US dollar, euro, etc). Our study offers a quarterly snapshot of "who" (investors based in which home currency) owns "what" (equity, debt) "where" (i.e. in which currency of denomination). Our approach breaks free of the triple coincidence in international finance and allows us to document a remarkable stability of fund holdings across broad asset classes and currencies. This stability implies that the average investment fund regularly rebalances its portfolio by realizing capital gains on assets that have appreciated and by buying asset classes and currencies whose price has recently lost value in relative terms -- a clear indication of downward-sloping asset demand. We find that around 74 percent of the variation in portfolio shares induced by price movements gets rebalanced at the quarterly frequency, but this share varies across asset classes, currencies, and investors. We find that most rebalancing takes place within asset classes and across currencies. Holdings of short-term bonds are almost perfectly rebalanced across currencies at the quarterly frequency, followed by equity positions, while long-term bonds portfolio positions are rebalanced the least. Finally, using a GIV approach, we estimate that, on average, exchange rates adjust by 2.62 percent in response to a 1 percent shock to rebalancing demand, indicating a price elasticity of demand that lies at the lower end of the range estimated in the literature. We develop an analytical framework based on market clearing to show that international portfolio rebalancing accounts for 90 percent of the variability in exchange rates.

• Fiscal Response to Monetary Shocks in the Euro Area
  This paper examines the impact of monetary policy shocks on key fiscal variables: government spending, tax revenues, interest payments, deficits, and bond issuance. Understanding this relationship is crucial because the fiscal response shapes the overall effect of monetary shocks on the economy. According to HANK models,  the negative effects of contractionary monetary policy are amplified in highly indebted countries, as rising debt servicing costs crowd out transfers to non-Ricardian households. This paper analyses the causal effect of monetary policy shocks on fiscal variables using a VAR model on a panel of 20 Euro Area member states since the adoption of the Euro. Contrary to HANK model predictions, I find that the rise in debt servicing costs after a contractionary shock is not economically significant enough to materially constrain fiscal policy, even in countries with large short-term debt exposures. Instead, Euro Area governments generally lean against monetary shocks through spending and transfers, dampening their transmission to GDP.