Job Market Paper

Inflows and Spillovers: Tracing the Impact of Bond Market Liberalization 

As bond markets grow, this affects not only the financing decisions of firms, but also the lending behavior of banks, and the resulting equilibrium allocation of credit and capital. First, using Japanese data from the 1980s and reforms that gave selective access to bond markets, it shows that firms that obtained access to the bond market used the funds from bond issuance to pay back bank debt. This large, positive funding shock led banks to increase lending to small and medium enterprises and real estate firms. Second, it proposes a new model of financial frictions that can match these findings, in which borrowers select into forms of financing based on their assets and productivity. The model predicts that bond liberalization combined with financial repression can significantly worsen the quality of the pool of borrowers, and so lower the profitability of banks. My results suggest that Japan's bond market liberalization contributed to both the real estate bubble in the 1980s and bank problems in the 1990s. Third, using the model I study the ways in which bond markets interact with other forms of capital account liberalization and financial shocks.

Working Papers

Default, Commitment, and Domestic Bank Holdings of Sovereign Debt

How do the incentives of domestic banks and sovereign governments interact? This paper presents a model of government default and banks that invest in the debt of their own sovereign. In the model, banks demand safe assets to use as collateral, and default affects bank equity. These losses inhibit banks' ability to attract deposits, leading to lower private credit provision, and lower output. This disincentivizes the sovereign from defaulting. The extent of output losses depends on characteristics of the banking system, including sovereign exposures, equity, and deposits. In turn, bank exposures are affected by default risk. The model is also used to show that policies such as financial repression can improve welfare, but worsen output losses in the event of default.

Bank-Firm Matching, Leverage, and Credit Quality

We observe considerable differences between banks in practice. What effects do these differences have, in theory? This paper explores the effect of bank heterogeneity on lending in a static assignment model, in which borrowers are assumed to be heterogeneous firms. Firms are assumed to differ in terms of productivity, and borrow from banks and uninformed investors in order to invest and produce. Banks are assumed to vary in terms of monitoring efficiency, and faced with the problem of deciding to whom to lend, among heterogeneous firms. The model is then used to explore patterns of bank-firm matching, and demonstrate why it may be that changes in the characteristics of banks and firms lead to changes in lending, leverage, and credit quality.