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Working Paper
The Effect of Central Bank Liquidity Injections on Bank Credit Supply
Crosignani, Matteo; Carpinelli, Luisa (2017-03)
We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to ...
Finance and Economics Discussion Series , Paper 2017-038

Working Paper
Optimal time-consistent government debt maturity
Debortoli, Davide; Yared, Pierre; Nunes, Ricardo (2016-05-17)
The current literature on a government's optimal debt maturity structure contends that by purchasing short-term assets and selling long-term debt, it is possible to fully insulate the economy against fiscal shocks. The required short and long positions are large relative to GDP and constant. The market value of debt adjusts automatically and the constant debt positions and fluctuating bond prices insulate against potential shocks. However, achieving the goal of averting future shocks depends on the government perfectly committing to the future fiscal policy, for without this sustained ...
Working Papers , Paper 16-4

Journal Article
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Crosignani, Matteo; Fonseca, Luis; Faria-e-Castro, Miguel (2020-06)
The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high yield eligible collateral securities matching the maturity of the central bank loans. Using unique security level data, we find that the European Central Bank's 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of Eurozone ...
Working Papers , Volume 112 , Pages 97-112

Working Paper
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Crosignani, Matteo; Fonseca, Luis; Faria-e-Castro, Miguel (2017-11-01)
The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high yield eligible collateral securities matching the maturity of the central bank loans. Using unique security level data, we find that the European Central Bank's 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of Eurozone ...
Working Papers , Paper 2017-039

Working Paper
Risk Management for Sovereign Debt Financing with Sustainability Conditions
Gavilan, Angel; Zenios, Stavros A.; Moshammer, Edmund; Consiglio, Andrea; Athanasopoulou, Marialena; Erce, Aitor (2019-06-01)
We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for ...
Globalization Institute Working Papers , Paper 367

Working Paper
Official Debt Restructurings and Development
Diaz-Cassou, Javier; Erce, Aitor; Cheng, Gong (2018-04-20)
Despite the frequency of official debt restructurings, little systematic evidence has been produced on their characteristics and implications. Using a dataset covering more than 400 Paris Club agreements, this paper fills that gap. It provides a comprehensive description of the evolving characteristics of these operations and studies their impact on debtors. The progressive introduction of new terms of treatment gradually turned the Paris Club from an institution primarily concerned with preserving creditors? claims into an instrument to foster development in the world?s poorer nations, among ...
Globalization Institute Working Papers , Paper 339

Working Paper
Exposure to international crises: trade vs. financial contagion
Grant, Everett (2016-08-01)
I identify new patterns in countries' economic performance over the 2007-2014 period based on proximity through distance, trade, and finance to the US subprime mortgage and Eurozone debt crisis areas. To understand the causes of the cross-country variation, I develop an open economy model with two transmission channels that can be shocked separately: international trade and finance. The model is the first to include a government and heterogeneous firms that can default independently of one another and has a novel endogenous cost of sovereign default. I calibrate the model to the average ...
Globalization Institute Working Papers , Paper 280

Working Paper
Bank and sovereign risk feedback loops
Erce, Aitor (2015-02-01)
Measures of Sovereign and Bank Risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro-area countries. The results show that Sovereign Risk feeds back into Bank Risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from Sovereign Risk into Bank Risk. In the opposite direction, in countries where banks fund their ...
Globalization Institute Working Papers , Paper 227

Working Paper
Bank crises and sovereign defaults in emerging markets: exploring the links
Balteanu, Irina; Erce, Aitor (2014-06-01)
This paper provides a set of stylized facts on the mechanisms through which banking and sovereign distress feed into each other, using a large sample of emerging economies over three decades. We first define ?twin crises? as events where banking crises and sovereign defaults combine, and further distinguish between those banking crises that end up in sovereign debt crises, and vice-versa. We then assess what differentiates ?single? episodes from ?twin? ones. Using an event analysis methodology, we study the behavior around crises of variables describing the balance sheet interconnection ...
Globalization Institute Working Papers , Paper 184

Working Paper
Optimal Bailouts in Banking and Sovereign Crises
Sosa-Padilla, César; Yom, Zeynep; Hur, Sewon (2021-01-29)
We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions ...
Globalization Institute Working Papers , Paper 406

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