Sovereign Debt Issuance and Selective Default, Forthcoming in Macroeconomic Dynamics
with Kirill Shakhnov, University of Surrey
[Bibtex citation]
[Manuscript 2025] [Manuscript 2023] [Manuscript 2019] [Manuscript 2018] [Manuscript 2017] [Manuscript 2016] [Manuscript 2015] [Manuscript 11-2014] [Manuscript 02-2014] [Manuscript 06-2013] [Manuscript 05-2013]
Presented at: [FEBS Crete 2023] [Graduate Institute Geneva 2017] [Bank of England 2017] [NBP 2016] [RES Brighton 2016] [MMF Cardiff 2015] [EEA Mannheim 2015] [Cardiff 2015] [ECB 2015] [ETH Zurich 2014] [CEPET Udine 2014] [SCE CEF Oslo 2014] [Dynamic Macro Vigo 2014] [Unicredit & Universities Belgrade 2014] [Econometric Society Minnesota 2014] [WU Vienna 2014] [Rimini 2014] [Konstanz 2014] [Barcelona 2014] [EUI 05-2013] [EUI 02-2013]
Sovereigns issue debt on both domestic and foreign markets and the the two debts are uncorrelated in the data. Sovereigns default mostly selectively. We propose a theory to rationalize these observations. A government chooses the optimal combination of two debts to smooth consumption, which is subject to output shock and volatile tax distortions. In equilibrium, it mostly relies on domestic debt to smooth the tax wedge and on foreign debt to smooth the output shock. Issuing either debt is less costly than raising taxes, but it is subject to default risk due to government’s limited commitment. A quantitative, calibrated model with two shocks and two debts replicates well debt-to-GDP ratios, default frequencies, cyclical properties of emerging economies and behavior of aggregates around default episodes.
Impact of COVID-19 Vaccinations on the UK Stock Market, Manchester School, 2025
with Chengyue Lu, University of Bristol MSc
[Bibtex citation]
[Manuscript 2025] [Manuscript 2024] [Manuscript 2023]
This study sheds light on the interaction between COVID-19 vaccinations and economic recovery from the pandemic crisis. Using London Stock Exchange data (Jan 10, 2021, to Feb 24, 2022) and fixed-effects regression methods, this study assesses COVID-19 vaccine effects on UK stock returns. Initial protocol doses have a strong positive impact on returns, while boosters have a modest positive impact. A logarithmic unit increase in daily vaccine doses corresponds to a 0.07 percentage point increase in daily stock return. Stringent closure policies strengthen the positive influence of the vaccine on returns. Sector-wise, healthcare responds most positively, while basic resources and food/beverage industries show positive but muted effects.
Euro Adoption and Bank Profitability in Central and Eastern Europe, Ekonomista, 2025
with Jan Zając, University of Bristol MSc
[Bibtex citation]
[Preprint 2025] [Manuscript 2023] [Manuscript 2022]
We provide new evidence on the effects of adopting a common European currency on banks’ profitability in the Central and Eastern Europe (CEE) region. We construct a panel of 1033 bank-year observations across 11 countries between 2006 and 2020. Our results suggest that the effect of the eurozone on the banks’ profitability is statistically not significant over a longer period but that the euro exerts downward pressure on banks’ profits when economic conditions are stable. Additionally, we contribute to the existing literature on banks’ profitability determinants in the CEE region and confirm that capitalization and bank size have positive, while liquidity and loans-to-assets ratio have a negative influence on profitability.
Imperfect Financial Markets and the Cyclicality of Social Spending, European Economic Review, 2024
with Maren Froemel, Bank of England
[Bibtex citation]
[Postprint 2024] [Online Appendix] [Preprint 2024] [Manuscript 2023] [Manuscript 2022] [Manuscript 2021] [Manuscript 07-2019] [Manuscript 05-2019]
Presented at: [EEA Milan 2022] [Leuven 2022] [Leicester 2020] [CFE London 2020] [ASSET Athens 2019] [Bath 2019] [INE PAN 2019 PL] [NBP 2019]
[Replication Package]
This paper explores the link between default risk and the cyclicality of fiscal expenditure. Empirically, we establish a stylized fact, that countries with higher sovereign risk have more procyclical fiscal policy. We show that this is mostly driven by consumption. We build a small open economy model with income inequality, government social transfers, and endogenous default risk to rationalize this fact. With low default social spending is countercyclical, inequality is procyclical, and external debt is used distortionary taxation. With high default risk, social spending is procyclical and of fiscal adjustment because taxation becomes costly for the government. The model offers implications about the cyclicality of the ratio of transfers to government consumption, confirm in the data.
On the Relationship Between Domestic Saving and the Current Account: Theory and Evidence for Developing Countries, Journal of Money Credit and Banking, 2020
with Evi Pappa, Universidad Carlos III de Madrid and Markus Brückner, Australian National University
[Bibtex citation]
[Postprint 2020] [Preprint 2019] [Manuscript 11-2018] [Manuscript 05-2018]
Presented at: [Bank of England 2018] [King’s College 2019] [Cardiff 2018]
[Replication Package]
We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that: (i) domestic saving has a small effect on the current account; (ii) domestic saving has a significant positive effect on the trade balance—this effect is much larger than the effect that domestic saving has on the current account; and (iii) domestic saving has a significant negative effect on net‐current transfers. We use countries in the SSA region during the period 1980‐2009 as a laboratory for an instrumental variables (IV) approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first‐stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply‐side shock. We construct a small open‐economy DSGE model with debt adjustment costs and endogenous current transfers to match the empirical findings. The model enables to examine the relationship between domestic saving and the current account for different types of shocks. An important message of our paper is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country’s accumulation of net foreign assets.
Sovereign Risk, Debt Composition, and Exchange Rate Regimes, Finance Research Letters, 2023
with Alice Keyser, University of Bristol MSc
[Bibtex citation]
[Postprint 2023] [Online Appendix 2023] [Manuscript 05-2023] [Manuscript 03-2023] [Proposal 2022]
Presented at: [INE PAN 2023 PL] [CCPF 2022]
Domestic and foreign debt risks, like exchange rate fluctuations and defaults, are influenced by the exchange rate regime. Analyzing data from 2004 to 2021 for 46 economies, we find that risk increases with higher public debt-to-GDP ratios (size effect), and a larger proportion of foreign debt (composition effect). However, the effects vary based on exchange rate regimes: composition effect is strong in floating, ambiguous in managed, and absent in monetary unions. The size effect is strong in monetary unions, weak in floating, and absent in managed regimes.
How Much do Public and Private Sectors Invest in Physical and Human capital?, International Review of Economics and Finance, 2023
with Jakub Sawulski, Warsaw School of Economics and Filip Leśniewicz, Inalco
[Bibtex citation]
[Postprint 2023] [Preprint 2023] [Manuscript 2022] [Manuscript 2021]
[Data xls]
[Can the state be a good investor?] [LSE Blog] [Raport po polsku]
Domestic and foreign debt risks, like exchange rate fluctuations and defaults, are influenced by the exchange rate regime. Analyzing data from 2004 to 2021 for 46 economies, we find that risk increases with higher public debt-to-GDP ratios (size effect), and a larger proportion of foreign debt (composition effect). However, the effects vary based on exchange rate regimes: composition effect is strong in floating, ambiguous in managed, and absent in monetary unions. The size effect is strong in monetary unions, weak in floating, and absent in managed regimes.
Defaulting on Covid Debt, Journal of International Financial Markets, Institutions and Money, 2022
with Kirill Shakhnov, University of Surrey
[Bibtex citation]
[Postprint 2022] [Preprint 2021] [Manuscript 05-2021] [Manuscript 10-2020] [Manuscript 07-2020]
Presented at: [SGH 2021 PL]
[Replication Package]
[VoxEU blog]
The COVID-19 pandemic causes sharp reductions of economic output and sharp increases in government expenditures. This increases the riskiness of sovereign debts, especially in emerging economies. We propose a framework to study debt sustainability. Economy is subject to productivity and expenditure shock, the government sets distortionary labour taxes and decides whether to repay its past domestic and foreign obligations. Foreign default is more likely after a negative productivity shock, while domestic default is more likely after a negative expenditure shock. Recent proposals that would ease the burden of foreign debt after COVID-19, would not prevent a wave of domestic defaults.
Foreign Banks and the Bank Lending Channel, Economic Inquiry, 2020
with Piotr Denderski, University of Leicester
[Bibtex citation]
[Postprint 2020] [Online appendix] [Preprint 2020] [Manuscript 2019] [Manuscript 2018] [Manuscript 2017] [Manuscript 2015] [Manuscript 2014]
Presented at: [Bank of England 2018] [Cardiff 2018] [Vistula 2018] [EEA 2017] [RES 2017] [IAAE Milan 2016] [NBP 2014] [EUI 2014]
We provide new evidence on bank ownership and the transmission of monetary policy using bank-level data on 453 banks in Central and Eastern European economies between 1998 and 2012. Only domestic banks adjust loans to changes in monetary policy, while foreign banks do not. Conventional wisdom says that this is because foreign banks can rely on parent banks’ funding to insulate against monetary policy shocks. In this paper we document an alternative explanation. Deposits in foreign banks do not react to monetary policy, hence the bank lending channel is only triggered in domestic banks.
Research Grant funded by the National Bank of Poland (NBP) – 2014
Winner of the Olga Radzyner Award by the Oesterreichische Nationalbank (OeNB) – 2017
Optimal Inflation, Monetary Integration and Asymmetric Sticky Prices, Oxford Economic Papers, 2020
[Bibtex citation]
[Postprint 2020] [Online Appendix 2020] [Preprint 2020] [Manuscript 2019] [Manuscript 2019] [Manuscript 2018] [Manuscript 2017] [Manuscript 10-2015] [Manuscript 05-2015]
Presented at: [SMYE Lisbon 2016] [Cardiff 2016]
[Replication Package]
This paper explores the optimal trend inflation rate in an open economy with and without a monetary union, accounting for empirically observed differences in the degree of price stickiness across countries. In a closed economy, the optimal inflation rate is negative, to offset the markup caused by imperfect competition. In an open economy, however, there is a “beggar-thy-neighbour” incentive and the optimal inflation is positive. Monetary union is therefore globally welfare improving, as it removes this externality. In both setups, as price stickiness increases, the degree of price dispersion increases, and so the optimal inflation rate tends towards zero. Therefore, with asymmetric price stickiness, the gains from monetary union are higher for economies with more flexible prices.
Working Papers:
Domestic and Foreign Sovereign Debt Stability
with Leonardo Barros Torres, University of Surrey and Kirill Shakhnov, University of Surrey
[Bibtex citation]
[Manuscript 2024]
Presented at: [Ioannina Meeting 2024] [Kent 2025] [EUI 2025]
We present a theory of determinants of sovereign debt stability on foreign and domestic markets. Besides the two traditional factors – debt size and output contractions, we highlight the role of the third factor: distortionary tax, which hinders the government’s ability to freely raise revenues. We emphasise the impact of tax distortions and output fluctuations on the trade-off between domestic and foreign debt stability. The paper explains why outright defaults in domestic debt are rare, despite its significant share in public debt, and provides insights into optimal debt issuance and taxation strategies.
Do Carbon Taxes Increase Inflation? Evidence from OECD countries
with Eltun Eyvaz-Zada, University of Bristol MSc
[Bibtex citation]
[Manuscript 2024]
This study investigates the effect of carbon taxes on inflation dynamics across OECD countries from 2002 to 2022. Using panel data models and system-GMM estimations, the results show that raising carbon taxes by $10 per tonne of CO2 contributes to a modest 0.16 percentage points increase in headline inflation and a 0.18 percentage points increase in food inflation, in the same year. Interestingly, the data shows no significant effects on core inflation and energy price inflation.
The Impact of China Zero-Covid Policy on Stock Returns
with Wenwen Luo, University of Bristol MSc
[Manuscript 2025]
Presented at [FMND Paris 2025]
This study examines the impact of China’s “Zero COVID” policy on the stock returns of the healthcare sector from January 2020 to December 2022. The results indicate that a one-unit increase in the Weighted Stringency Index significantly increased stock returns by 0.0000187 percentage points, while vaccination rates negatively affected returns by 0.000404 points. These findings underscore the complex dynamics between pandemic policies and market performance in China’s healthcare sector, providing important insights into the policy’s long-term implications for investor confidence.