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European Economic Review, Vol. 145, June 2022
[Published Version] [Working Paper Version] [Data: Asset Purchase News]
This paper proposes an identification strategy for news about sovereign debt-based asset purchases. It measures sovereign yield changes that are unrelated to movements in risk-free interest rates or risk premiums. Around ECB announcements, these reflect the anticipation of shifts in the effective supply of government debt, caused by central bank purchases. This paper documents that asset purchase news about government bonds have substantial spillovers to corporate bond and stock markets, within and beyond the euro area. Spillovers are unequal across euro-area countries, as stock prices rise most in low-risk countries with very large firms. In contrast, sovereign yields fall homogeneously.
with Donghai Zhang
[Latest Draft] [SSRN Working Paper]
We document three pieces of evidence about the investment channel of monetary policy. First, an interest rate cut reshapes the distribution of investment rates as it leads to fewer small or zero investment rates and more large investment rates. Second, the change in the distribution is more pronounced among young than old firms. We emphasize the relevance of the extensive margin—firms deciding whether to invest or not—in explaining these findings. Third, a decomposition exercise indicates that the extensive margin accounts for around 50% of the effect of monetary policy on the average investment rate and more than 50% of the heterogeneous effect on young firms. To interpret these empirical findings, we build a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics. In the model, young (small) firms—often standing in for financially constrained firms—are more sensitive to monetary policy even without a financial accelerator mechanism.