In this paper, I study the transmission of aggregate supply funding shocks in a lending network and quantitatively assess the implications on the allocation efficiency of funding provision of the US Money Markets Funds Industry. I build a tractable model that features banks and funds that trade bilaterally subject to an incomplete network of existing counterparties and bilateral bargaining. I discipline the model using data of the funds' portfolio. I show how to identify the key parameters of the model exploiting granular shocks of connected agents. Taking as primitives the observed changes in the assets under the management of prime funds in the COVID-19 dash-for-cash, the model accounts for 85% of the drop in total lending and 70% of the increase in price dispersion. I show that the allocation is inefficient and that the planner would deviate more resources towards banks after the funding shock compared to the decentralized solution. Finally, I use the model to explore the effectiveness of the Overnight Repo Repurchase Facility.
(with I. Aldasoro, F. Grinberg and T. Mancini-Griffoli)
We provide novel empirical evidence on the effects of cross-border bank lending on emerging market economies' (EMEs) macro-financial conditions. We identify causal effects by leveraging the heterogeneity in the size distribution of bilateral cross-border bank lending to construct granular instrumental variables for aggregate cross-border bank lending to 22 EMEs. We find that cross-border bank credit causes higher domestic activity in EMEs and looser financial conditions. Financial condition indices ease, nominal and real effective exchange rates appreciate, sovereign and corporate spreads narrow, domestic interest rates fall, and housing prices increase. Similarly, real domestic credit grows, real GDP expands, and imports rise. Effects are weaker for countries with relatively higher levels of capital inflow controls, supporting the view that these policy measures can be effective in dampening the vulnerabilities associated with external funding shocks.
Trading Frictions in Money Markets (joint with I. Aldasoro & F. Grinberg)
International Asset Pricing and Contagion Effects: Evidence from Sovereign Bond Benchmarks (joint with C. He)