Working Papers

Inflation and Disintermediation (with Matthew Baron), Journal of Financial Economics, conditionally accepted

Abstract: We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks cut lending, reducing local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.

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, recent empirical evidence shows that currency depreciations are not always expansionary. 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 43 countries and provide evidence on the general importance of this channel across historical global currency depreciations.

Bank Regulation and Supervision: A Symbiotic Relationship (with Tirupam Goel) R&R at the Journal of Banking and Finance

Abstract: Supervisory assessments such as stress-tests gauge banks’ riskiness and allow regulators to impose bank-specific capital regulation. This can improve welfare. Yet, regulation based on noisy supervision can decrease welfare by mis-classifying banks, distorting incentives, and creating riskier banks. Regulation should not be bank-specific in such cases. When bank defaults are costlier, supervision should lower the probability that riskier banks go undetected, i.e., reduce false-negatives even if this leads to more false-positives. When the supervisor can conduct a more comprehensive but costlier assessment that optimally reduces both false-positive and false-negative rates, the regulator should make capital requirements more bank specific.

Relative Pricing of Private and Public Debt: The Role of Money Creation Channel (with Jan Bena and Joyce Xuejing Guan)

We examine how the money creation function of banks affects the relative cost of firm financing in the bank loan vs public bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm with the same maturity and at the same time, we show that the loan-bond spread is lower for firms impacted by information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and argue that it is consistent with the “money creation” hypothesis in the theory of financial intermediation according to which banks need to keep information about their assets secret to produce private money.

Lending by Servicing: Monetary Policy Transmission through Shadow Banks (with Malin Hu, Raluca Roman, and Keling Zheng)

Abstract: We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.


 The Determinants of China’s International Portfolio Equity Allocations (with Grace Weishi Gu and Eswar Prasad), IMF Economic Review, May 2020 (previously circulated as China’s Impact on Global Financial Markets, NBER Working paper No. 26311)

Abstract: We analyze shifts in the structure of China’s capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs’ joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not.

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

Abstract: We analyze the transmission of changes in commodity prices to bank lending in a large sample of developing countries. A bank-level analysis shows that a fall in commodity net export prices is associated with a reduction of bank lending, particularly for commodity exporters and during episodes of terms-of-trade decline. We complement this analysis with loan-level data from a credit register, which allows us to identify the effect of a commodity price shock on the supply of credit, controlling for unobserved factors that could drive borrowers’ credit demand. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices to lending more aggressively.

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

Work in Progress

The Shadow Banking Channel of Secondary Mortgage Market Regulations (with Malin Hu)

Differential Crowding out Effects of Government Bonds and Government Loans (with David Jaume, Martin Tobal, and Everardo Tellez)


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

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