Research

Working Papers

• The Value of Government Debt with Domestic Arrears
  This paper analyses the use of domestic arrears, i.e. overdue payments by the government to its domestic beneficiaries, as an instrument to increase the valuation of marketable government debt and thus ease the pressure on public finances. Domestic arrears represents a claim on government revenues different than the claim by investors in marketable debt. Arrears increase the present value of government surpluses (i) through their expected lower seniority compared to bonds, (ii) by generating revenue from the avoided interest payments on the amounts in arrears, and (iii) by accommodating the repayment of investors in marketable debt at the expense of domestic beneficiaries at times of high-marginal-utility. Through these channels, domestic arrears warrant higher valuations for marketable debt and help the government avoid liquidity and roll-over crises. British government data from 1700 to 1913 are used as evidence for this new instrument. Arrears are on average only 4.9% of GDP over the sample period, but they contribute on average to 10 to 30 percentage points higher debt valuations over GDP. Thus, domestic arrears contribute to the resolution of recently raised government debt valuation puzzles, in which the market value of debt exceeds the expected present discounted value of surpluses, for the U.S. nowadays and the U.K. prior to WWI.

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• The Granular Origins of the Global Financial Cycle (with Torsten Ehlers (IMF), Mathias Hoffmann (UZH), Boris Hofmann (BIS) and Christian Schmieder (BIS))
  We investigate how investment funds' buying and selling of assets (investment flows) impact asset prices and exchange rates. Using granular data on global investment funds' security-level holdings from 2007 to 2022, we analyze the characteristics of their portfolio holdings and adjustments 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 in which currency) owns what (equity, debt) where (i.e. in which currency of denomination). We develop a parsimonious analytical framework to capture asset prices through the network structure of global portfolio holdings (market and portfolio shares) and observable investor activities (fund inflows and portfolio rebalancing). In line with Gabaix and Koijen (2022) inelastic market hypothesis, we observe a remarkable stability of the network structure of global portfolio holdings over time. This stability is key to understanding how investor flows cause international price and exchange rate movements, allowing us to estimate multipliers across different asset classes and currencies without the need of a comprehensive asset demand model.

• Fiscal Response to Monetary Shocks in the Euro Zone (with Tobias Mueller (UZH))
  This paper studies the response of fiscal variables (tax revenues, government expenditures, surpluses) to monetary shocks in the Euro Zone, using local projections on a panel of 14 member states over a 20-year period. Against the intuition of HANK models in which the presence of sovereign debt amplifies the transmission of monetary policy due to changes in debt servicing costs, our preliminary results suggest that interest expenditures do not increase following a positive shock in the ECB reference rate. Investigating the differences in the responses between European Core countries (Germany, France, the Netherlands, Belgium, Austria) and European Periphery (Italy, Ireland, Spain, Portugal), we find that social transfers increase in the Core, while (short-term) debt issuance increases in the Periphery. In the short run, the debt level rises significantly in the Periphery. These differences in fiscal responses can be attributed to variations in the social security systems as conjectured in Bayer, Kriwoluzky, Mueller, Seyrich (2023): households whose consumption is insured by the government (as in the Core) prefer a balanced budget since they have no need to privately save in bonds.