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The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis
with Pierre-Olivier Gourinchas and Philippe Martin.
Published December 2025 in Journal of the European Economic Association 23 (6), pp. 2003-2047. (link)
| Abstract
Despite a formal "no-bailout clause," we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of 2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-GDP ratio, and default costs). Our model embeds a "Southern view" of the crisis (transfers did not help) and a "Northern view" (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high-debt countries. Hence, the model provides a potential justification for the often decried policy of "kicking the can down the road". Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the Eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
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What determines passthrough of policy rates to deposit rates in the euro area?
with Friederike Niepmann.
Published July 2023 in FEDS Notes . (link)
| Abstract
Interest rates on bank deposits are sticky and move only sluggishly following changes in central bank policy rates. As deposits are typically the largest share of bank liabilities, deposit rate stickiness plays a key role for bank funding costs and profitability. This note examines passthrough from European Central Bank (ECB) policy rates to bank deposit rates across euro-area banking sectors. We first review bank deposits in the euro area and show that, historically, passthrough from policy rates into deposit rates has been sluggish and, depending on the maturity of deposits, incomplete. Taking a closer look at the current tightening episode, which began with the ECB's first rate hike in July 2022, passthrough into deposit rates has been even more sluggish compared to previous tightening episodes. High levels of excess reserves appear to be an important factor in explaining this sluggishness even after accounting for the effect of imperfect banking competition. We conclude that the relatively low rate of passthrough today is likely because banks have little incentive to attract additional deposits while liquidity is abundant relative to their capacity to expand lending.
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Financial Failures and Depositor Quality: Evidence from Building and Loan Associations in California
Published March 2023 in Journal of Economic History 83 (1), pp. 87-130. (link)
| Abstract
Flightiness, or depositor sensitivity to liquidity needs, can be an important determinant of financial distress. I leverage institutional differences—that attract depositors with varying flightiness—across building and loan associations in California during the Great Depression. A new type of plan, the Dayton plan, involved less restrictive savings plans and lower withdrawal penalties. Dayton plans in California were more likely to close during the Great Depression. Archival evidence on lending rates and returns supports the flightiness mechanism.
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Unemployment Effects of Stay-at-Home Orders: Evidence from High Frequency Claims Data
with ChaeWon Baek, Peter McCrory, and Preston Mui.
Published November 2021 in The Review of Economics and Statistics 103 (5), pp. 979–993. (link)
| Abstract
Without effective mitigation strategies, epidemiological models project that upwards of 2 million Americans are at risk of death from the coronavirus pandemic, with many more subject to uncertain health complications. Heeding the warning, in mid-March 2020, state and local officials in the United States began issuing Stay-at-Home (SAH) orders, instructing people to remain at home except to do essential tasks or to do work deemed essential. By April 4th, 2020, nearly 95% of the U.S. population was under such directives. Over the same three week period, initial claims for unemployment spiked to unprecedented levels. In this paper, we use the high-frequency, decentralized implementation of SAH policies, along with high-frequency unemployment insurance (UI) claims, to disentangle the local effect of SAH policies from the general economic disruption wrought by the pandemic that affected all regions similarly. We find that, all else equal, each employment-weighted week of Stay-at-Home exposure increased a state’s weekly initial UI claims by 1.9% of its employment level. Ignoring cross-regional spillovers, this finding implies that, of the 16 million UI claims made between March 14, 2020 and April 4, 2020, only 4 million are attributable to the Stay-at-Home directives. This evidence suggests that the direct effect of SAH orders accounted for a significant, but minority share of the overall rise in unemployment claims, and that the majority of the rise in unemployment during this period would have occurred in the absence of these orders. This suggests that any economic recovery that arises from undoing SAH orders will be limited if the underlying pandemic is not resolved.
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Firm Entry and Macroeconomic Dynamics: A State-Level Analysis
with Francois Gourio and Michael Siemer.
Published May 2016 in American Economic Review Papers and Proceedings 106 (5), pp. 214-218. (link)
| Abstract
Using an annual panel of US states over the period 1982-2014, we estimate the response of macroeconomic variables to a shock to the number of new firms (startups). We find that these shocks have significant effects that persist for many years on real GDP, productivity, and population. This is consistent with simple models of firm dynamics where a "missing generation" of firms affects productivity persistently.
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Fiscal Consequences of Paying Interest on Reserves
with Marco Bassetto.
Published December 2013 in Fiscal Studies 34 (4), pp. 413-436. (link)
| Abstract
We review the role of the central bank's balance sheet in a textbook monetary model and explore what changes if the central bank is allowed to pay interest on its liabilities. When the central bank (CB) cannot pay interest, away from the zero lower bound its (real) balance sheet is limited by the demand for money. Furthermore, if securities are not marked to market and the central bank holds its bonds to maturity, it is impossible for the CB to make losses, and it always obtains profits from being a monopoly provider of money. When the option of paying interest on liabilities is allowed, the limit on the CB's balance sheet is lifted. In this case, the CB is free to take on interest‐rate risk – for example, by buying long‐term securities and financing those purchases with short‐term debt that pays the market interest rate. This is a risky enterprise that can lead to additional profits but also to losses. To the extent that losses exceed the profits of the monopoly operations, the CB faces two options - either it is recapitalised by Treasury or it increases its monopoly profits by raising the inflation tax.
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Forecasting inflation and the Great Recession
with Marco Bassetto and Christine Ostrowski.
Published September 2013 in Economic Perspectives 37 (Q3), pp. 79-106. (link)
| Abstract
This article shows how the recovery of inflation in 2009-10 occurred precisely at the only time (since 1985) the models would predict disinflation, i.e., inflation went up when the models said it should go down.