“Imperfect Financial Markets and the Cyclicality of Social Spending”
2nd round revisions in European Economic Review, 2024
[Bibtex citation] [Revised manuscript 2023] [Slides 2022]
with Maren Froemel, Bank of England
Presented at:
EEA Congress – Milan 2022, Leuven – 2022, Polish Academy of Sciences – Warsaw – 2022, Leicester – 2020, CFE – London 2020, ASSET – Athens 2019, Bath – 2019, NBP Summer Workshop – Warsaw 2019
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.
“Sovereign Debt Issuance and Selective Default”
Submitted, 2023
[Bibtex citation] [Revised manuscript 2023] [Slides 2023]
with Kirill Shakhnov, University of Surrey
Presented at:
FEBS – Crete 2023, FMND – Paris 2023, Graduate Institute – Geneva 2017, Bank of England – 2017, NBP Summer Workshop – Warsaw 2016, MMF – Cardiff 2015, EEA – Mannheim 2015, Cardiff – 2015, ECB – Frankfurt 2015, ETH – Zurich 2014, Uni Konstanz – 2014, CREI – Barcelona 2014, Dynamic Macroeconomics – Vigo 2014, UniCredit & Universities – Belgrade 2014, Econometric Society – Minneapolis 2014, WU – Vienna 2014, CEPET – Udine 2014, CEF – Oslo 2014, RCEA – Rimini 2014
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.
“Domestic and Foreign Sovereign Debt Stability“
Submitted, 2023
[Bibtex citation] [Manuscript]
with Leonardo Torres and Kirill Shakhnov, University of Surrey
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.
Sovereign Risk, Debt Composition, and Exchange Rate Regimes
Finance Research Letters, 2023
[Bibtex citation] [Accepted manuscript] [Slides 2021]
with Alice Keyser, MSc graduate University of Bristol
Presented at: Cross Country Perspectives in Finance – Pafos 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? Towards a new classification of investments
International Review of Economics and Finance, 2023
[Bibtex citation] [Accepted manuscript] [Data xls]
[Can the state be a good investor? – Report]
[Czy państwo może być dobrym inwestorem? – Raport]
with Jakub Sawulski, Warsaw School of Economics and Filip Leśniewicz, INALCO
Presented at: Polish Economic Institute – Warsaw 2021
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
[Bibtex citation] [Accepted manuscript] [Replication Files] [Slides 2021]
with Kirill Shakhnov, University of Surrey
Presented at: Warsaw School of Economics – 2021
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.
“On the Relationship Between Domestic Saving and the Current Account: Theory and Evidence for Developing Countries”
Journal of Money Credit and Banking, 2020
[Bibtex citation] [Accepted manuscript] [Replication files] [Slides 2019]
with Evi Pappa, Universidad Carlos III de Madrid and Markus Brückner, Australian National University
Presented at: Bank of England – 2018, King’s Business School KCL – London 2018, Cardiff Uni – 2018
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.
“Foreign Banks and the Bank Lending Channel”
Economic Inquiry, 2020
[Bibtex citation] [Accepted manuscript] [Online appendix] [Slides 2018]
with Piotr Denderski, University of Leicester
Presented at: Bank of England – 2018, Cardiff Uni – 2018, Vienna National Bank – 2017, EEA – Lisbon 2017, RES – Bristol 2017, IAAE – Milan 2016, VU – Amsterdam 2016, EUI – Florence 2015, TI Amsterdam – 2014, NBP – Warsaw 2014
Research Grant funded by the National Bank of Poland (NBP) – 2014
Winner of the Olga Radzyner Award by the Oesterreichische Nationalbank (OeNB) – 2017
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.
“Optimal Inflation, Monetary Integration and Asymmetric Sticky Prices”
Oxford Economic Papers, 2020
[Bibtex citation] [Accepted manuscript] [Online appendix and replication files] [Slides 2016]
Presented at: SMYE – Lisbon 2016, Cardiff University – 2016, EUI – Florence – 2013
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.