Research

Working Papers

• The Value of Government Debt with Domestic Arrears
  This paper documents the use of domestic arrears, i.e. overdue payments by the government to its domestic beneficiaries, as a form of alternative financing used to improve the valuation of government bonds and, thus, satisfy public financing needs. For my analysis, I use a historical dataset from the UK (1700-1900), where Army and Navy Bills served as payment to merchants when cash payments were delayed. 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. By creating arrears, the government increases fiscal space, allowing the issuance of more bonds, compared to a no-arrears counterfactual. 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, 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, an estimated dataset of payment 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 the Jarocinski and Karadi (2020) 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.

• Empirical Causal Asset Pricing with Trading Costs (with Luca Gaegauf (Vontobel), Vincent Wolff (SNB)) [available upon request]
  Do stock prices of publicly listed companies respond to changes in trading costs? We document a significant and asymmetric effect of tick-size changes on prices by leveraging a novel policy framework that allows for a causal randomized control trial difference-in-differences analysis. The doubling of the tick size leads to a decrease in prices by 0.9 percent to 1.3 percent, whereas halving the tick size results in an increase of 3.3 percent to 3.5 percent. The price effect is more pronounced in smaller firms and tick-unconstrained stocks. We report substantial excess returns on the day before the tick-size change attributable to quote and price clustering and, with caution, to strategic short-term price manipulation.