Working Papers

"Corporate Credit Risk and Capital Flows in Emerging Market Economies"
(Job market paper, revised draft coming soon!)

Foreign-currency denominated international bonds have become an increasingly popular financing instrument for many emerging market (EM) firms over the past decade. Credit risks that are associated with such securities could simultaneously serve as an attracting and a repelling factor to capital from abroad. Using the universe of corporate bonds issued by non-financial firms in 27 EM countries and 11 tax havens, I show that credit spreads on corporate bonds can explain international capital flows. Importantly, they do so above and beyond well-known drivers of capital flows such as global risk, US monetary policy, and EM sovereign risk. I exploit idiosyncratic shocks to large bond issuers to construct granular instrumental variables (GIVs) 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. My findings thus reconcile the empirical and theoretical literature on push and pull factors of international capital flows.

Figure: The Excess Bond Premium (EBP) of EMEs and the EBP of Gilchrist & Zakrajšek (2012) display a strong correlation before the Global Financial Crisis (60%) but a low correlation (22%) over the past decade . The EME-EBP is based on an unbalanced panel of 27 EMEs. The EBP estimated by Gilchrist and Zakrajšek (2012) for the US is publicly available via the Federal Reserve.

The Zero Lower Bound and Financial Stability: A New Role for Central Banks?
(with Dimitrios P. Tsomocos, revised draft coming soon)

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.

Figure: Default losses under different weights on monetary policy and financial stability objectives in the central banks' objective function.

Work in Progress


"Firm Heterogeneity and Financial Shock Transmission to Asset Prices"
(with Livia Chitu and Magdalena Grothe)


Corporate valuations have been stretched and credit spreads have been compressed in recent years. A sudden reversal in asset prices may hit firms heterogeneously depending on their fundamental characteristics. Using granular data on a panel of S&P 500 firms covering weekly bond spreads, CDS spreads, and equity prices from 2000 to 2021, we explore to which extent global risk-off and monetary policy tightening shocks affect corporate asset prices heterogeneously (i) according to firms' fundamentals (profitability, leverage, interest rate coverage, sectoral characteristics), (ii) via different market segment (bonds and stocks), (iii) via different fundamental and non-fundamental pricing channels (default risk or excess bond premium), and (iv) across different time periods (pre-/post- ZLB environment). We contribute to our understanding of how investors differentiate across risk profiles in downturns and which corporate segments in US capital markets are more vulnerable to sudden funding cost reversals. Knowledge thereof can shed light on whether macroeconomic fluctuations have granular origins in only a subset of particularly vulnerable firm segments.

“The Role of Financial Stability for Monetary Policy in Emerging Market Economies”

Since the Global Financial Crisis, central banks in advanced economies (AEs) have gradually adopted “leaning-against-the-wind” (LAW) policies to combat excessive credit growth while stabilizing inflation and output. By contrast, several central banks in emerging market economies (EMEs) still follow a single mandate – guaranteeing price stability. Given EMEs’ high exposure to both domestic and external financial imbalances, is there also a role for financial stability in the conduct of monetary policy in EMEs? Using the Mexican economy as a laboratory, I build a small open economy New-Keynesian model with banks and endogenous firm default to compare and contrast the performance of alternative monetary policy rules that react to destabilizing forces of an external funding shock to banks’ balance sheet. My findings support an interest rate rule augmented by a measure of private default. A LAW policy rule reduces the volatility in response to an external shock on both the real and financial side of the economy.

“Fiscal and Monetary Policies in the Context of Indebted Demand after Covid-19”

(with Frédéric Boissay, Benoit Mojon and Cyril Monnet)



Policy Work/ Other Articles

"The role of credit risk in recent global corporate bond valuations", with Livia Chitu and Magdalena Grothe, European Central Bank, Economics Bulletin, Issue 2/2022, March 2022.

Time inconsistency in recent monetary policy”, with Charles A.E. Goodhart and Dimitrios P. Tsomocos, VoxEU column, August 2020.