Working Papers

Abstract:
What is the impact of granular credit risk on banks and on the economy? We provide the first causal identification of single-name counterparty exposure risk in bank portfolios by applying a new empirical approach on an administrative matched bank-firm dataset from Norway. Exploiting the fat tail properties of the loan share distribution we use a Gabaix and Koijen (2020a,b) granular instrumental variable strategy to show that idiosyncratic borrower risk survives aggregation in banks portfolios. We also find that this granular credit risk spills over from affected banks to firms, decreases investment, and increases the probability of default of non-granular borrowers, thereby sizably affecting the macroeconomy.

*Hélène Rey thanks the ERC for financial support (ERC Advanced Grant 695722).

Abstract:
This paper uses computational linguistics to introduce a novel measure of firm-level cyber-risk exposure based on quarterly earnings conference calls of listed firms. Our data span 13,000 firms from 85 countries over 2002-2021. We show cyber-risk exposure predicts cyber-attacks, affects stock returns and profits, and is priced in the equity option market. Cyber-risks spill over across firms and pass through from firm to sectoral level. The geography of cyber-risk is well approximated by a gravity model in which financial proximity is key. Back-of-the-envelope calculations suggest that the global cost of cyber-risk is over $200 billion per year.

Abstract:
Financial crises cause economic, social and political havoc. Macroprudential policies are gaining traction but are still severely under-researched compared to monetary policy and fiscal policy. We use the general framework of sequential predictions also called online machine learning to forecast crises out-of-sample. Our methodology is based on model averaging and is meta-statistic since we can incorporate any predictive model of crises in our set of experts and test its ability to add information. We are able to predict systemic financial crises twelve quarters ahead out-of-sample with high signal-to-noise ratio in most cases. We analyse which models provide the most information for our predictions at each point in time and for each country, allowing us to gain some insights into economic mechanisms underlying the building of risk in economies.

Abstract:
The current environment is characterized by low real rates and by policy rates close to or at their eective lower bound in all major nancial areas. We analyze these unusual economic conditions from a secular perspective using data on aggregate consumption, wealth and asset
returns. Our present-value approach decomposes fluctuations in the global consumption-to wealth ratio over long periods of time and show that this ratio anticipates future movements of the global real rate of interest. Our analysis identies two historical episodes where the consumption-to-wealth ratio declined rapidly below its historical average: in the late 1920s and again in the mid 2000s. Each episode was followed by a severe global nancial crisis and depressed real rates for an extended period of time. Our empirical estimates suggest that the
world real rate of interest is likely to remain low or negative for an extended period of time.


Abstract:
We study the international transmission of the monetary policy of the two world's giants: China and the US. From East to West, the channels of global transmission differ markedly. US monetary policy shocks aect the global economy primarily through their effects on integrated financial markets, global asset prices, and capital flows. EMEs in particular see both a reduction in inflows and a surge in outflows when the market tide turns as a result of a US monetary contraction. Conversely, international trade, commodity prices and global value chains are the main channels through which Chinese monetary policy transmits worldwide. AEs with a strong manufacturing sector are particularly sensitive to these disturbances.

Abstract:
The center country of the International Monetary System enjoys an “exorbitant privilege” that significantly weakens its external constraint. In exchange for this “exorbitant privilege” we document that the US provides insurance to the rest of the world, especially in times of global stress. This is the “exorbitant duty”.

*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows"

Abstract:
This article summarizes our views on the role of an 'aggregation bias' in explaining the PPP Puzzle, in response to the several papers recently written in reaction to our initial contribution: "PPP Strikes Back: Aggregation and the Real Exchange Rate", published in the Quarterly Journal of Economics, Vol. CXX, Issue 1, pp.1-43. February 2005.