Research

Working Papers

Banks’ Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks (R&R at the Review of Financial Studies)

Abstract: In contrast to standard theory, exchange rates have limited effects on the real economy. I show that a bank lending channel of exchange rates can explain this disconnect. I provide causal evidence on the importance of this channel using a large and unanticipated currency appreciation shock from Switzerland. I construct a novel dataset on foreign currency exposure of Swiss banks and bank-firm relationships, and show that the currency appreciation shock enabled banks with net foreign currency liability exposure to increase lending, allowing firms to increase investment. The bank lending channel thus partially offsets the negative effect of currency appreciation on exports, explaining the muted response of aggregate output to the shock. I also construct a new historical database on banks’ foreign currency exposure for a sample of 22 countries and provide evidence on the general importance of this channel across historical global currency appreciation episodes.

Making Stable Coins Stable(r): Can Regulation Help? (with Tirupam Goel and Ulf Lewrick) R&R at the Review of Finance

Abstract: We model a stablecoin issuer that optimises capital, cash and bond holdings under persistent stablecoin flows. Absent regulation, the issuer holds little capital and favours interest-bearing but less-liquid bonds over cash. This exposes coin-holders to default risks and poses systemic spillovers via price impact of bond fire-sales. How can regulation mitigate these risks? We consider capital and liquidity thresholds as usable buffers. They can be breached in stress but discipline issuers by triggering additional redemptions, thus endogenising stablecoin flows. The thresholds work through asymmetric channels. While the liquidity threshold only raises cash holdings, the capital threshold increases both capital and cash. Both thresholds mitigate default and spillover risks, suggesting they are substitutes. However, they are complements for regulators targeting both risks. Using stablecoin flows and US Treasury market depth, we calibrate a two-way mapping that enables regulators to recover capital-liquidity threshold combinations implied by chosen risk targets (and vice-versa).

Differential Crowding out Effects of Government Bonds and Loans: Evidence from an Emerging Market Economy (with David Jaume, Everardo Tellez, and Martin Tobal) R&R at the Review of Finance

Abstract: We provide the first empirical evidence that the type of bank lending to the government—direct loans versus sovereign bond holdings—critically shapes the extent of private credit crowding out in an Emerging Market and Developing Economy (EMDE). Using a novel dataset covering all commercial bank loans to private firms and the government in Mexico, as well as banks’ sovereign bond holdings, we exploit within-firm variation in exposure to different types of government financing. We find that crowding out of small and medium-sized enterprise (SME) credit is three times larger when banks extend direct loans to the government than when they hold sovereign bonds. The smaller effect for bonds arises from their collateral value in the interbank market, which helps banks secure funding and sustain credit supply. Our findings highlight the role of bond market development in mitigating borrowing costs in EMDEs.

Beyond the Fundamentals: Cross-Country Media Narrative Dispersion and Global Capital Flows (with Wentong Chen and Eswar Prasad)

Abstract: We provide the first systematic evidence that domestic media narratives shape how institutional investors perceive the same foreign economy and, in turn, affect international capital flows. Using more than one million newspaper articles from 16 economies, we construct country-specific measures of media attention and sentiment toward China, an increasingly important investment destination with severe information frictions. We document large and persistent cross-country dispersion in sentiment. This disagreement arises almost entirely from differences in how countries frame common information, rather than from differences in topic coverage. Within-topic sentiment dispersion is driven mainly by cross-country differences in interpretation of common information, not by differences in how quickly new information is incorporated. Using a shift-share identification strategy, we then establish that this narrative heterogeneity causally affects cross-border portfolio flows to China. Investors with greater private information about China are less responsive to domestic media narratives and negative narratives matter more than positive ones. These findings identify domestic media narratives as a distinct and quantitatively important determinant of international capital allocation.

Autocracies, Infrastructure Financing, and Credit Spreads (with Ron Giammarino, Alberto Teguia, and Emmanuel Yimfor)

Abstract: We examine the role of autocratic restrictions in explaining debt financing of infrastructure and the associated credit spreads. We focus on two autocratic powers; the ability to restrict out-migration and to expropriate output. We show how these restrictions provide a deeper basis for the “democracy advantage,” the notion that democracies obtain better financing terms than autocracies. We show theoretically that restrictions on migration enhance debt repayment, increase the degree to which infrastructure is debt financed, and reduce credit spreads while the ability to expropriate wealth has the opposite effect. We develop empirical measures for these autocratic restrictions and use them to show support for our theoretical predictions.

The Impact of Private Money Creation: Asset Allocation and “Opacity Discount” in Bank Lending (with Jan Bena and Joyce Xuejing Guan)

Abstract: This paper examines how the private money creation function of financial intermediaries influences their asset composition and firms’ cost of debt. Following Dang, Gorton, Holmström, and Ordonez (2017), we hypothesize that intermediaries create money-like liabilities by backing them with assets that are safe and opaque, thereby minimizing information sensitivity. Using a quasi-natural experiment-the 2014 U.S. MMF reform-we show that changes in the moneyness of MMF liabilities significantly impact their asset allocation. Institutional MMFs reduced their portfolio weight of opaque assets-defined as holdings not disclosed by the MMF-by 40%. Furthermore, firm-level analysis of syndicated loans and bond issuances reveals that positive information acquisition cost shocks to borrowers reduce the loan-bond spread-the relative cost of firm financing using bank loans versus the public bond market-highlighting the “opacity discount” in bank lending. Instrumental variable estimation and event studies support the causal interpretation of our findings.

Publications

Lending by Servicing: Monetary Policy Transmission through Shadow Banks (with Malin Hu, Raluca Roman, and Keling Zheng) conditionally accepted, Review of Financial Studies

  • Best Paper Award: IFABS Conference, 2022

Inflation and Disintermediation (with Matthew Baron), Journal of Financial Economics, October 2024

Bank Regulation and Supervision: A Symbiotic Relationship (with Tirupam Goel)  Journal of Banking and Finance, May 2024

  • Best Paper Award: India Finance Conference, 2022

 The Determinants of China’s International Portfolio Equity Allocations (with Grace Weishi Gu and Eswar Prasad), IMF Economic Review, May 2020 

Commodity Prices and Bank Lending (with Rupa Duttagupta and Andrea Presbitero), Economic Inquiry, August 2019

Other Work

When does Bad News Stick: Topic Level Asymmetry in Narrative Dynamics (with Wentong Chen and Eswar Prasad), invited contribution at the Review of Corporate Finance Studies, Papers and Proceedings 

A Vision and Action Plan for Financial Sector Development and Reforms in India (with Eswar Prasad), Brookings Institution Report, January 2018.

Discussions

What Do $40 Trillion of Portfolio Holdings Say about Monetary Policy Transmission? (Chuck Fang and Kairong Xiao), NFA 2025

Indirect Credit Supply: How Bank Lending to Private Credit Shapes Monetary Policy Transmission (Sharjil Haque, Young Soo Jang, Jessie Jiaxu Wang), NFA 2025

Monetary Policy and Corporate Investment: The Equity Financing Channel (Mehdi Beyhaghi, Murray Z. Frank, Ping McLemore, and Ali Sanati), EFA 2025

The Effect of Student Loans on Entrepreneurial Firm Risk-taking, Performance, and Access to Venture Capital with Implications for the Effects of Student Loan Forgiveness Programs on Entrepreneurship (Thomas J. Chemmanur, Karthik Krishnan, Harshit Rajaiya, and Pinshuo Wang), ISB Summer Conference, 2025

Liquidity Flows to Bank-Affiliated Broker Dealers: Insights from Volumes and Prices (Jennie Bai, Erik Bostrom, Sebastian Infante, and Victoria Ivashina), UBC Summer Finance Conference, 2025

Mortgage Structure, Financial Stability, and Risk Sharing (Vadim Elenev and Lu Liu), WFA 2025

Out of Sight, Out of Mind: Nearby Branch Closures and Small Business Growth (Ben Ranish, Andrea Stella, and Jeffery Zhang), Spring Finance Workshop, April 2025

EXIM’s Exit: The Real Effects of Trade Financing by Export Credit Agencies (Adrien Matray, Karsten Muller, Chenzi Xu, and Poorya Kabir), NFA, September 2024 

How do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe (Viral Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger), EFA, August 2024

Business Inflation Exposure and Bank Lending (Ricardo Correa, Teodora Paligorova, Andrei Zlate), IBEFA, July 2024

Creditor Coalitions in Bankruptcy (Jingzhi Huang, Stefan Lewellen, Zhe Wang), pre-WFA ECWFC, June 2024

Stagflationary Stock Returns (Ben Knox and Yannick Timmer), SFS Cavalcade, May 2024

The Secular Decline in Interest Rates and the Rise of Shadow Banks (Andrés Sarto and Olivier Wang), FSU Truist Beach Conference, April 2024

Closing the Revolving Door  (Joseph Kalmenovitz, Siddharth Vij, and Kairong Xiao), FIRS 2023

Can Cashless Payments Spur Economic Growth? (Tamanna Singh Dubey and Amiyatosh Purnanandam), Columbia Summit on the Indian Economy, March 2023

Bank Funding Risk, Reference Rates, and Credit Supply (Harry Cooperman, Darrell Duffie, Stephan Luck, Zachry Wang, and Yilin Yang), ASU Sonoran Winter Finance Conference 2023

  • Best Discussant Award

Open Banking under Maturity Transformation (Itay Goldstein, Chong Huang, Liyan Yang), NFA 2022

Political Power-Sharing, Firm Entry, and Economic Growth: Evidence from Multiple Elected Representatives (Harsha Dutta, Pulak Ghosh, Arkodipta Sarkar, and Nishant Vats), EFA 2022

Distributional Implications of Bank Branch Expansions: Evidence from India (Reajul Alam Chowdhury, Kanika Mahajan, and S.K. Ritadhi), SERI 2022

Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets (Anthony A. DeFusco, Huan Tang, Constantine Yannelis), WFA 2022

The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments (Christian Mucke, Loriana Pelizzon, Vincenzo Pezone, and Anjan Thakor), SFS Cavalcade 2022

The Value of Lending Relationships (Andrew Bird, Michael Hertzel, Stephen Karolyi, and Thomas G. Ruchti), NFA 2021

Dirty Money: How Banks Influence Financial Crime (Janet Gao, Joseph Pacelli, Jan Schneemeier, Yufeng Wu), CICF 2021

Regulatory Circumvention: Underpricing and Flipping in Marketplace Lending (Shyam Venkatesan, Brian Wolfe, Jun Yang, Woongsun Yoo), MFA 2021

U.S. Populist Rhetoric and Currency Returns (Ilias Filippou, Arie E. Gozluklu, My T. Nguyen, Mark P. Taylor), FMA 2020

Operational Risk Capital (Thomas Colon, Xing Huan, and Steven Ongena), FMA 2020

Arbitrage Capital of Global Banks (Alyssa Anderson, Wenxin Du, and Bernd Schlusche), SFS Cavalcade, May 2020

Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses (Charles W. Calomiris, Mauricio Larrain, Sergio L. Schmukler, Tomas Williams), 8th Annual West Coast Workshop in International Finance, Seattle 2019

Depositors Disciplining Banks: The Impact of Scandals (Mikael Homanen), 8th MoFiR Workshop on Banking, Chicago 2019

Exchange Rate Exposure: Firm Level Analysis on Multinational Firms (Lei Zhu and Dazhi Zheng), Western Economic Association International (WEAI), 2018

Rent-extracting Mergers (Alex Xi He and Daniel le Maire), Graduate Student Dissertation Workshop, WEAI, 2018