Academic Publications
Climate Transition Risk and The Role of Bank Capital Regulation
(Forthcoming) Economic Modelling (2024), joint with Enric Martorell
Working Paper Banco de España, here.
Presentations: Malta - 2023 Dynare Conference, Montpellier - 2023 International Conference in Finance, Banking and Accounting (ICFBA), Paris - Bank the France, 2023 Green Finance Research Advances Conference, Society for Economic Dynamics (Barcelon 2024).
How should bank capital requirements be set to deal with climate-related transition risks? We build a general equilibrium macro banking model where production requires fossil and low-carbon energy intermediate inputs, and the banking sector is subject to volatility risk linked to changes in energy prices. Introducing carbon taxes to reduce carbon emissions in fossil energy induces risk spillovers into the banking sector. Sectoral capital requirements can effectively address risks from energy-related exposures, benefiting household welfare and indirectly facilitating capital reallocation. Absent carbon taxes, implementing fossil penalizing capital requirements does not reduce emissions significantly and may threaten financial stability. During the transition, capital requirements can complement carbon tax policies, safeguarding financial stability and trading off long-run welfare gains at the expense of lower investment and credit supply in the short run.
The Amplification Effects of Adverse Selection in Mortgage Credit Supply
Journal of Housing Economics (2023)
SUERF The European Money and Finance Forum, Policy Brief
Working Paper Banco de España, here.
How do information frictions in the securitization market amplify the response of mortgage credit supply to house price shocks ? Securitization prices and quantities endogenously result from an optimal contracting problem between investors and banks. Banks are better informed than investors about the quality of mortgages they originate, leading to adverse selection in securitization. Investors use the quantity sold as a screening device to induce banks to reveal truthful information. We find that adverse selection amplifies the response of a bank’s mortgage credit to house price shocks. The degree of amplification is also a function of the technological differences in managing portfolios between banks and investors. The model is informative on how information frictions can induce large fluctuations in mortgage credit supply.
Countercyclical Fiscal Rule, an Analysis for Chile
Revista Compendium. Cuadernos de Economia y Administración (2016)
How efficient are countercyclical fiscal rules? I study the role of countercyclical fiscal rules, for small and open commodity-exporting economies, in stabilizing output and real exchange rate fluctuations. I propose a fiscal expenditure rule based on a country’s output gap, and on the commodity-price gap, along the lines of the Chilean structural fiscal rule launched in 2001. My framework encompasses the Chilean rule, in which government expenditure is acyclical, by covering alternatives that allow for explicit countercyclical expenditure. I embed the proposed rule in a small-open-economy DSGE model calibrated to match key features of the Chilean economy. I find that the proposed rule can reduce output volatility by one-third and real exchange rate volatility by 10 percentages compared to a benchmark scenario in which fiscal expenditure is acyclical.
Working Papers
Mortgage Securitization and Information Frictions in General Equilibrium [Paper]
Revise and Resubmit at the Review of Economic Dynamics
2022 Working Paper Banco de España. Summary Research Feature
2021 runner-up best paper of the XXVI meeting of Central Bank Research Network by CEMLA
2019 Winner of the AREUEA Homer Hoyt Doctoral Dissertation Award
I develop a model of the U.S. housing finance system that delivers an equilibrium connection between the securitization and mortgage credit markets. An endogenous securitization market efficiently reallocates illiquid assets, increases liquidity to fund mortgage lending, and lowers mortgage rates for households. However, its benefits are hindered by originators' private information about loan quality which leads to adverse selection in securitization. Fluctuations in household credit risk induce expansion and contractions of mortgage credit through the securitization liquidity channel. Adverse selection generates a multiplier effect of household shocks. Applying the model to the Great Financial Crisis, we quantify that information frictions amplified the observed mortgage credit contraction by 1.7 times. The multiplier is an endogenous function of the severity of information frictions. Our assessment of the post-GFC economy indicates that credit guarantees in the securitization market have contributed to reducing the volatility of quantities and prices in the credit and securitization markets, along with the probability of market collapses. We provide insights into the benefits and drawbacks of credit guarantees as a stabilization instrument.
Work in Progress
On the Interactions between Monetary and Macroprudential Policies
joint with Jorge Abad, Joel Marbet and Galo Nuño
Wedges: Taxes vs Policies. A cross-country analysis
joint with Paulina Restrepo-Echavarria, Lee Ohanian, Mark Wright
Using a novel panel data set of tax variables for all states in the U.S. we document that the average corporate income tax rate has declined by approximately 40\% from 1980 to 2016. At the same time, we observe that most states have gradually shifted towards imposing a sales-only apportionment weight on multi-state firms. We ask whether these patterns are consistent with states competing in setting their corporate tax policy. Empirically, we find evidence of strategic interaction in setting tax policies between neighboring states. Theoretically, we show that moving towards a sales-only apportionment scheme is consistent with the prediction of a dynamic general equilibrium model of tax competition that incorporates the Formula Apportionment rule.