I am an economist at the Bank of England
Field of Interest: Macroeconomics, Heterogeneous Agents, Financial Economics.
Abstract: Since 2000 the European banking sector experienced high earnings volatility both across time and among individual banks, culminating in a sharp decline in profitability in 2008, which remained thereafter at much lower levels compared to pre‐crisis levels. In this paper, we use panel data on a sample of European banks to answer the following questions: (i) how does bank profitability respond to macroeconomic variables? (ii) Is there heterogeneity in that response? To identify the effect of GDP growth on profitability, we use an instrumental variable approach with world GDP growth as an instrument. We find that there is a positive association between real GDP growth and bank profitability due to the procyclicality of impairments. We also find that, on average, European banks benefit from higher reference rates and steeper yield curves.
WORK IN PROGRESS
Mortgage Borrowing Caps: Leverage, Default, and Welfare - JOB MARKET PAPER [pdf] (joint with Leonor Queiró)
Abstract: We explore the transmission channels of macroprudential policy in the form of caps on household mortgage borrowing. We employ an overlapping generations model with uninsurable labor income risk, housing, and long-term defaultable loans to measure the long-run economic impact of maximum loan-to-value (LTV) and debt payment-to-income (PTI) caps on mortgage contracts in an economy without aggregate risk. Calibrating the model to Portugal, which implemented borrowing caps in 2018, we find that leverage caps can lower mortgage debt to output by one-third and eliminate the default rate. However, this comes at the cost of a 2 percent reduction in household welfare, chiefly among income and wealth-poor agents. PTI limits reduce default by limiting debt service but increase indebtedness and household leverage. This mechanism stems from the interaction between labor market risk and the payment-to-income cap: Households fear future adverse income shocks may constrain their access to credit markets and borrow earlier with lower down payments. Finally, we find that the policymaker can achieve similar cuts in default with a smaller welfare cost by setting a less stringent LTV cap or a more restrictive PTI cap.
Abstract: Since 1980 there has been a steady increase in earnings inequality alongside rapid technological growth in the U.S. economy. To what extent does technological change explain the observed increase in earnings dispersion? How does it affect the optimal progressivity of the tax system? To answer these questions, we develop an incomplete markets model with occupational choice. We estimate an aggregate production function with the four occupations in Autor et al. (2003) and calibrate our model to resemble the U.S. economy in 1980. We find that technological transformation can fully account for the increase in earnings dispersion between 1980 and 2015. The main driver is the rising relative wage of non-routine cognitive occupations, which benefit the most from complementarity with capital. In isolation, increasing earnings inequality might strengthen the case for redistributive policies. However, we find that a significant drop in the progressivity of the tax system is optimal. Lower progressivity leads to an inflow of workers into higher-paid occupations, raising the wages of those at the bottom of the wage distribution, and incentivises the accumulation of more productive capital, increasing total output. Technological change also raised real return rates on saving, weakening the insurance role of the progressive tax system.
Inefficiency Distribution of the European Banking System [pdf]
Abstract: The inefficiency of the European banking system has been pointed out as a major vulnerability from a financial stability point-of-view. This paper contributes to the assessment of this vulnerability by considering several important features of financial intermediation such as factor prices, economies of scope and scale. We use a stochastic frontier analysis method to characterize the production function of financial intermediation in Europe and quantify inefficiency. We find that: (i) in 2013 the median European bank operated with costs 25 to 100% above the efficient level; (ii) there is ambiguous evidence on productivity growth, although inefficiency of financial intermediation has been increasing over time, possibly driven by the least efficient banks; (iii) increasing returns to scale are limited to smaller banks, although scope savings are found to be robust across all models for the average bank and (iv) that there exists a positive association between inefficiency-cost and implicit credit spreads, which are an indicator of credit market restrictions.
A Semi-Structural Framework for Measuring Credit Cycles in Europe [pdf] (joint with Ana Pereira)
Abstract: We develop a framework for evaluating the accumulation of cyclical systemic risk using an unobserved component model of credit to the private sector. The structure of the model is derived from theory where the latent cyclical component is driven by lending standards, given prices and quantities of collateral in the economy. Computations are carried out using only the information available to the policymaker when deciding on a policy stance. Our measure depends on the availability of only a small set of variables that are usually available with a sufficiently long length. Its leading properties regarding the detection of systemic financial crises are tested against benchmark real-time indicators for several European countries. The evaluation exercise relies on a set of metrics commonly used in the context of early-warning systems of crises and is performed both in-sample and out-of-sample. The latter exercise allows us to assess the usefulness of including our measure in a risk monitoring system designed to be used regularly by policymakers. We conclude that our proposed model-based indicator ranks against other measures, even in the most demanding out-of-sample exercise.