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Working Paper
Improving Sovereign Debt Restructurings
The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings, and the recent global pandemic crisis has further reignited this discussion. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features: maturity choice and debt ...
Working Paper
Improving Sovereign Debt Restructurings
The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that ...
Working Paper
News, sovereign debt maturity, and default risk
Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. In a VAR estimation, a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a ...
Working Paper
Do Costly Internal Equity Injections Reveal Bank Expectations about Post-Crisis Real Outcomes?
We construct a novel signal of bank expectations utilizing confidential data and a regulatory constraint imposed on bank internal capital markets during the 2008 crisis that made internal equity injections to commercial bank subsidiaries difficult to reverse. When the US government initiated a $176 billion recapitalization program during the crisis, this constraint made it costly ex-ante for multi-bank holding companies (MBHC) to use these funds for the purpose of recapitalizing subsidiaries against future anticipated losses; in contrast, lending the funds to subsidiaries was exempt from the ...
Working Paper
On the cyclicality of the interest rate in emerging economy models: solution methods matter
We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space ...
Working Paper
U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies
We investigate the effects of U.S. unconventional monetary policies on sovereign yields, foreign exchange rates, and stock prices in emerging market economies (EMEs), and we analyze how these effects depend on country-specifc characteristics. We find that, although EME asset prices, mainly those of sovereign bonds, responded strongly to unconventional monetary policy announcements, these responses were not outsized with respect to a model that takes into account each country's time-varying vulnerability to U.S. interest rates affected by monetary policy shocks.
Working Paper
Bottom-up Leading Macroeconomic Indicators: An Application to Non-Financial Corporate Defaults using Machine Learning
This paper constructs a leading macroeconomic indicator from microeconomic data using recent machine learning techniques. Using tree-based methods, we estimate probabilities of default for publicly traded non-financial firms in the United States. We then use the cross-section of out-of-sample predicted default probabilities to construct a leading indicator of non-financial corporate health. The index predicts real economic outcomes such as GDP growth and employment up to eight quarters ahead. Impulse responses validate the interpretation of the index as a measure of financial stress.
Working Paper
Bank Lending Standards and the U.S. Economy
The provision of bank credit to firms and households affects macroeconomic performance. We use survey measures of changes in bank lending standards, disaggregated by loan category, to quantify the effect of changes in banks’ attitudes toward lending on aggregate output, inflation, and interest rates. Bank lending to businesses is particularly important for macroeconomic outcomes, with peak effects on output of around half a percentage point after four quarters of the initial shock. These effects depend on the stage of the business cycle and the proximity of the short-term interest rate to ...
Briefing
Redlining and U.S. Residential Mortgage Market Pricing
Does redlining have implications for mortgage pricing today? This article summarizes our research assessing long-lasting implications from the "residential security maps" developed by the Home Owners Loan Corp. in the 1930s that color/letter-coded U.S. neighborhoods. The study finds (1) that the average levels of mortgage rates and fees are modestly higher for all borrowers on the historically targeted (redlined, that is, C-coded or D-coded) side of a neighborhood color boundary; (2) that mortgage rates and fees are modestly higher for minorities on either side of the boundary; (3) that these ...