Research

Working Papers

• The Value of Government Debt with Domestic Arrears (Job Market Paper)
  Given the rising levels of public debt globally, a key question is whether governments will have enough fiscal space to navigate the next crisis. This paper documents the use of non-marketable financial resources by governments in order to affect the valuation of government bonds and, thus, satisfy public financing needs. The paper analyses domestic arrears, i.e. overdue payments by the government to its domestic beneficiaries, as source of non-marketable financing. An unexplored historical dataset from the UK during 1700-1900 compensates for the lack of reliable modern data on arrears. I find that arrears, whose face value averages 4.3 percent of GDP, have a risk-adjusted present value of 12.9 percent of GDP on average. This means that arrears increase fiscal space, allowing the issuance of more marketable debt or alternatively reducing its yield. The intuition is that arrears accumulate during bad times and redirect cash flows from suppliers to bondholders: thus, they provide risk-averse bondholders with an insurance-like cash flow that justifies higher bond valuations. The omission of arrears in the valuation of public marketable debt leads to an underestimation of its fundamental value either through mismeasurement of government expenditures (which might be inflated as compensation for suppliers), or due to the disregard of revenues extracted from suppliers via financial repression. The paper contributes to the resolution of recently raised public debt valuation puzzles and provides a new rationale for the emergence of arrears. Finally, a new dataset of outstanding arrears for EU member countries is presented, revealing size and cyclicality akin to that of historical UK data.

Watch here a layman explanation of this research project.

• The Granular Origins of the Global Financial Cycle (with Torsten Ehlers (IMF), Mathias Hoffmann (UZH), Boris Hofmann (BIS) and Christian Schmieder (BIS)) [available upon request]
  We investigate how investment fund flows impact asset prices and exchange rates. Using granular data on the universe of investment funds from 2007 to 2022, we analyze the characteristics of fund portfolio holdings across major asset classes (equity, long-term, and short-term debt) and currencies (US dollar, euro, etc). Our study offers a quarterly snapshot of who (investors in which currency) owns what (equity, debt) where (i.e. in which currency of denomination). We then use granular fund flow shocks to estimate demand elasticities for major asset classes and currencies using the granular instrumental variable (GIV) methodology. We interpret these elasticity estimates within a parsimonious analytical framework, where the asset price responses to observable investor activities (fund inflows and portfolio rebalancing)  are expressed as function of the network structure of global portfolio holdings (market and portfolio shares). In line with the inelastic market hypothesis (Gabaix and Koijen, 2022), we observe a remarkable stability of the network structure of global portfolio holdings over time. This stability is key to understanding how investor flows cause international price and exchange rate movements, allowing us to estimate multipliers across different asset classes and currencies without the need of a comprehensive asset demand model. 

• Fiscal Response to Monetary Shocks in the Euro Area (with Tobias Mueller (UZH)) [available upon request]
  This paper studies the response of fiscal variables (tax revenues, government expenditures, surpluses) to monetary shocks in the Euro Area, using local projections and VAR impulse response functions on a panel of 20 member states over a 22-year period. Against the intuition of HANK models in which the presence of sovereign debt amplifies the transmission of monetary policy due to changes in debt servicing costs, our preliminary results suggest that interest expenditures do not increase following a positive shock in the ECB reference rate. Investigating the differences in the responses between European Core countries (Germany, France, the Netherlands, Belgium, Austria) and European Periphery (Italy, Ireland, Spain, Portugal), we find that social transfers increase in the Core, while (short-term) debt issuance increases in the Periphery. In the short run, the debt level rises significantly in the Periphery. These differences in fiscal responses can be attributed to variations in the social security systems as conjectured in Bayer, Kriwoluzky, Mueller, Seyrich (2023): households whose consumption is insured by the government (as in the Core) prefer a balanced budget since they have no need to privately save in bonds.