Work in Progress
Public Debt Maturity, QE and Interest Rate Risk (JMP)
Draft Coming Soon
This paper studies the factors influencing the optimal maturity policy of sovereign debt in a context where the central bank is implementing quantitative easing (QE). I first show that QE shortens the maturity structure of privately-held sovereign debt, and argue that this change may not align with the prescription of the fiscal authority’s optimal debt management policy. Subsequently, I develop a model wherein the fiscal authority faces interest rate risk and must determine the optimal maturity structure conditional on shocks that prompt the central bank to engage in QE. The model predicts that, in instances of declining expected future interest rates, the fiscal authority’s optimal policy is to lenghten the debt maturity, putting it in conflict with QE. Conversely, when expected future interest rates remain flat and the central bank acts merely as a market maker following a financial stability shock, the optimal debt management policy is to shorten the debt maturity, aligning the fiscal authority and central bank in the same direction. Lastly, I use US data to construct a metric measuring the amount of maturity/duration extracted from the markets during QEs and injected by Treasury auctions. This metric is employed to test the model predictions and to investigate whether there is any coordination between the Fed and the Treasury in periods of QE. The findings reveal that the Treasury adjusts its issuance policy during QEs, and empirical results are in line with the model predictions: when expected future interest rates fall, the Treasury’s issuance policy goes in the opposite direction to the Fed’s QE. When they are flat, the Treasury shortens the maturity of its issuances and adopts a more passive strategy, awaiting for the Fed to end or reduce QE before readjusting its issuance policy.
Central Bank Equity Transfer Rules: The Special Case of the South African Reserve Bank, with Annik Ketterle and Pedro Maia
Most Recent Draft - November 2023
We show that South Africa is an outlier by international standards having accumulated close to 8% of GDP in positive central bank equity. An institutional framework for transfers from the Reserve Bank to the Treasury exists, but it has not yet been employed. In a stylised model we show that by following international practice and using those revaluation gains, South Africa can enhance its allocation of public resources and improve its liability management strategy. Savings over a twenty-year period could range from 5 to 20 percentage points of GDP if the South African Reserve Bank adopted a 50% equity buffer transfer rule, conditional on the assumed local currency path. Further, mindful of the South African legal specificity, we discuss why a transfer rule should be accompanied by a compensation mechanism from the Treasury to the Reserve Bank to address the sterilisation costs that arise over time.
Draft Coming Soon
We propose a novel approach to extract factors from large data sets that maximize the predictive content for individual quantiles of a forecast distribution of interest. From the financial data underlying the Chicago Fed's National Financial Conditions Index, we build targeted financial conditions indices for the quantiles of future US GDP growth. We show that our indices provide meaningful insights on the importance of individual data series and categories for different horizons and quantiles. Our indices also yield considerably better out-of-sample density forecasts of US GDP growth than competing models.
Bank Leverage at the Zero Lower Bound
In modern economies, when lending, banks play a central role in deposit and money creation at the same time that are subject to several balance sheet constraints. This paper models bank lending decision in this setting and analyzes how it is a affected by the banks' balance sheet dynamics, especially in a low interest rates environment. In addition, it replicates a liquidity shock such as the one that hit the U.S. Treasuries market in March 2020, finding that capital requirements may limit banks' activities in bond markets following shocks like this. Finally, it shows that when banking sector leverage reaches high levels, a quantitative easing has the potential to transform a liquidity crisis into a credit crisis, worsening banks' situation.
Fiscal Space in an Era of Central Bank Activism, with Márcio Garcia and Pedro Maia
Opinion Article (in Portuguese) - Valor Econômico, 11 February 2022
Central banks’ liabilities are still often excluded from debt sustainability analyses, despite the enormous expansions in central banks’ balance sheets that we have witnessed in recent years. In this paper, we construct a dataset that consolidates both general government and central bank balance sheets and argue that this metric allows for fairer comparisons across countries. The findings highlight the increasingly important role played by central banks in managing and altering the profile of the privately-held sovereign debt. In addition, they shed light into the impact of FX reserves accumulation and QE on reducing the debt maturity, which cannot be captered by traditional general government debt metric.