Working Papers

"Corporate  Credit Risk and Capital Flows in Emerging Market Economies"
[Working paper]

Emerging market (EM) corporate debt carries ambiguous risks: an attractive investment opportunity to some, heightened credit risk may also deter capital from abroad. Using the universe of USD-denominated corporate bonds issued by non-financial firms in a large sample of EM countries and tax havens, I show that credit spreads on corporate bonds can explain international capital flows. Importantly, they do so after controlling for well-known drivers of capital flows such as global risk, US monetary policy, and EM sovereign risk. I exploit idiosyncratic shocks to granular bond issuers to identify the causal effect of domestic corporate credit risk on capital flows. In a static country panel framework, I find robust evidence that EM corporate credit risk serves as an attractor of international capital flows. The results of a dynamic panel local projections exercise further suggest that the build-up of corporate credit risk over time can unleash capital flow reversals, deteriorate the terms of trade, lower output, and raise unemployment by a significant order of magnitude. My findings thus reconcile the empirical and theoretical literature on push and pull factors of international capital flows.

“The Zero Lower Bound and Financial Stability: A New Role for Central Banks?” 
(with Dimitrios P. Tsomocos)
[Working paper]

Are critics’ concerns for bank profitability a justification for the European Central Bank to raise interest rates from the (zero) lower bound (ZLB)? Using a general equilibrium model with banks and collateral default, we analyze optimal monetary and regulatory policy upon departure from the ZLB. Rather than supporting bank profits, higher interest rates depress inflation when higher debt servicing costs increase losses from default. Precisely these losses offset any gains from banks’ interest margin. Monetary policy operates beyond traditional channels, stressing the relevance of Fisherian debt-deflation forces. They warrant incorporating financial stability objectives into central banks’ objective function.