Periodic Reporting for period 1 - MACROTRENDS_FINANCE (Macroeconomic trends and the efficiency of financial markets)
Période du rapport: 2022-09-01 au 2025-02-28
Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e. lenders) to those who can put them to productive use (i.e. borrowers). A defining feature of these markets is that lenders give up goods today in exchange for a promise to receive goods in the future. These promises are only valuable if they are expected to be honored. We can think of promises as being backed by collateral, i.e. a stream of future income that borrowers can credibly pledge. An economy’s stock of collateral determines the amount and type of promises that can be traded, and thus the ability of financial markets to intermediate resources efficiently.
Over the past few years, I have devoted my research to understanding the drivers of a modern economy’s stock of collateral. Collateral is prone to fluctuations, which can be abrupt and have significant effects on the real economy. Before the 2007–08 financial crisis, advanced economies experienced a long expansion phase with rising asset prices and private credit, followed by a sharp downturn. Governments that supported private promises saw their own creditworthiness questioned. The collateral that had fueled the boom seemed to evaporate.
Motivated by these boom-bust cycles, I explored the role of asset bubbles, governments, and information in generating collateral and sustaining credit. But another key aspect requires further study. In a world of heterogeneous agents, what matters is not just the overall stock of collateral but also its distribution across firms, sectors, and countries. This distribution is endogenous, shaped by general equilibrium forces and subject to change. This project set focuses on three global shifts and their effects on collateral and financial efficiency: (i) declining interest rates; (ii) rising fixed costs; and (iii) shifting geopolitical power.
The first set of projects builds on a major trend: the global decline in real interest rates. While lower rates are expected to stimulate activity, concerns have emerged about possible side effects, including reduced financial stability and slower innovation. A common worry is that low rates encourage unproductive investments. While some credit booms have shown weak productivity, the reasons why this is problematic are still being explored. Why should it matter if previously unprofitable activities become viable? Can this lead to social inefficiency? If so, how does it shape the macroeconomic effects of falling rates? I explore these questions with co-authors. One key finding is that lower rates can misallocate resources and even reduce output.
The second set of projects focuses on rising fixed costs, a notable trend in the US economy. The ratio of fixed to total costs among Compustat firms rose from 17% in 1960 to 33% in 2020. What explains this rise? What are the macroeconomic implications? Do they indicate inefficiency, or are they a result of expanding markets?
Together with Vladimir Asriyan, Maria Ptashkina, and Jaume Ventura, we build a framework with increasing returns and heterogeneous goods. Each good requires a fixed number of workers to start production and more workers per unit. Goods differ in both fixed and marginal costs. The economy's fixed-cost share is shaped by both extensive (activating goods) and intensive (producing more units) margins. Intensive growth tends to reduce the fixed-cost share, while extensive growth raises it by adding goods with high fixed costs. We use this model to explain US trends and assess the distortions affecting both margins.
The final project, with Fernando Broner, Josefin Meyer, and Christoph Trebesch, turns to global trade and financial integration. While its effects are widely studied, its causes are less understood and often treated as exogenous. We focus on geopolitical factors that drive or reverse integration.
We note that current integration is not unique. In the late 19th century, emerging markets were also highly integrated. Both waves occurred under a hegemonic power—Britain then, the US now. This raises two key questions:
(i) Is there a causal relationship between a hegemonic power and global integration?
(ii) What are the implications of the weakening of US hegemony relative to China? What lies ahead for globalization?
To address this, we develop a model of hegemonic power and globalization and test its predictions using a treaty database covering multilateral and bilateral agreements over the past 200 years.
Over the past few years, I have devoted my research to understanding the drivers of a modern economy’s stock of collateral. Collateral is prone to fluctuations, which can be abrupt and have significant effects on the real economy. Before the 2007–08 financial crisis, advanced economies experienced a long expansion phase with rising asset prices and private credit, followed by a sharp downturn. Governments that supported private promises saw their own creditworthiness questioned. The collateral that had fueled the boom seemed to evaporate.
Motivated by these boom-bust cycles, I explored the role of asset bubbles, governments, and information in generating collateral and sustaining credit. But another key aspect requires further study. In a world of heterogeneous agents, what matters is not just the overall stock of collateral but also its distribution across firms, sectors, and countries. This distribution is endogenous, shaped by general equilibrium forces and subject to change. This project set focuses on three global shifts and their effects on collateral and financial efficiency: (i) declining interest rates; (ii) rising fixed costs; and (iii) shifting geopolitical power.
The first set of projects builds on a major trend: the global decline in real interest rates. While lower rates are expected to stimulate activity, concerns have emerged about possible side effects, including reduced financial stability and slower innovation. A common worry is that low rates encourage unproductive investments. While some credit booms have shown weak productivity, the reasons why this is problematic are still being explored. Why should it matter if previously unprofitable activities become viable? Can this lead to social inefficiency? If so, how does it shape the macroeconomic effects of falling rates? I explore these questions with co-authors. One key finding is that lower rates can misallocate resources and even reduce output.
The second set of projects focuses on rising fixed costs, a notable trend in the US economy. The ratio of fixed to total costs among Compustat firms rose from 17% in 1960 to 33% in 2020. What explains this rise? What are the macroeconomic implications? Do they indicate inefficiency, or are they a result of expanding markets?
Together with Vladimir Asriyan, Maria Ptashkina, and Jaume Ventura, we build a framework with increasing returns and heterogeneous goods. Each good requires a fixed number of workers to start production and more workers per unit. Goods differ in both fixed and marginal costs. The economy's fixed-cost share is shaped by both extensive (activating goods) and intensive (producing more units) margins. Intensive growth tends to reduce the fixed-cost share, while extensive growth raises it by adding goods with high fixed costs. We use this model to explain US trends and assess the distortions affecting both margins.
The final project, with Fernando Broner, Josefin Meyer, and Christoph Trebesch, turns to global trade and financial integration. While its effects are widely studied, its causes are less understood and often treated as exogenous. We focus on geopolitical factors that drive or reverse integration.
We note that current integration is not unique. In the late 19th century, emerging markets were also highly integrated. Both waves occurred under a hegemonic power—Britain then, the US now. This raises two key questions:
(i) Is there a causal relationship between a hegemonic power and global integration?
(ii) What are the implications of the weakening of US hegemony relative to China? What lies ahead for globalization?
To address this, we develop a model of hegemonic power and globalization and test its predictions using a treaty database covering multilateral and bilateral agreements over the past 200 years.
The project has so far led to the completion of two working papers, both of which have been presented at numerous universities and conferences. Jointly considered, these papers explain why reductions in interest rates may backfire and hurt economic activity, and why large-scale credit guarantee programs – like the ones implemented in much of Europe in the wake of COVID – may lead to a suboptimal use of guarantees when these are allocated through banks.
1. Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium , (with V. Asriyan , L. Laeven , A. Van der Ghote and V. Vanasco ). This paper has recently been accepted for publication at the Review of Economic Studies.
2. Banks vs. Firms: Who Benefits from Credit Guarantees? (with Sergio Mayordomo and Victoria Vanasco).
In addition, there are two additional papers which are close to completion, although they have also been already presented at various universities and conferences:
1. Fixed Costs, Product Heterogeneity, and the Force of Competition (with Vladimir Asriyan, Maria Ptashkina, and Jaume Ventura).
2. Hegemonic Globalization (with Fernando Broner, Josefin Meyer, and Christoph Trebesch).
1. Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium , (with V. Asriyan , L. Laeven , A. Van der Ghote and V. Vanasco ). This paper has recently been accepted for publication at the Review of Economic Studies.
2. Banks vs. Firms: Who Benefits from Credit Guarantees? (with Sergio Mayordomo and Victoria Vanasco).
In addition, there are two additional papers which are close to completion, although they have also been already presented at various universities and conferences:
1. Fixed Costs, Product Heterogeneity, and the Force of Competition (with Vladimir Asriyan, Maria Ptashkina, and Jaume Ventura).
2. Hegemonic Globalization (with Fernando Broner, Josefin Meyer, and Christoph Trebesch).
The project has produced several results beyond the state-of-the-art. Two stand out.
First, it provides a clear, simple characterization of how interest rate changes affect an economy with financial frictions and heterogeneous firms—clarifying why falling rates can have negative effects, a point previously not well understood.
Second, it introduces a new theoretical framework to analyze the link between hegemonic powers and economic integration—key to understanding China’s rise and current global fragmentation. Additionally, our 200-year treaties database is a valuable contribution for future research.
***Note***
The following explanation should be the caption for the image, which I could not paste in the space allotted below.
This figure, from “Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium”, illustrates the effects of falling real interest rates, as seen in the U.S. since the 1980s (left panel). Initially, output rises (solid line, right panel), but simulations show it may fall over time. Though lower rates boost investment and capital (dashed line), they worsen capital allocation: less productive entrepreneurs bid up prices, crowding out more efficient but constrained firms. This reallocation effect ultimately reduces output (dotted line).
First, it provides a clear, simple characterization of how interest rate changes affect an economy with financial frictions and heterogeneous firms—clarifying why falling rates can have negative effects, a point previously not well understood.
Second, it introduces a new theoretical framework to analyze the link between hegemonic powers and economic integration—key to understanding China’s rise and current global fragmentation. Additionally, our 200-year treaties database is a valuable contribution for future research.
***Note***
The following explanation should be the caption for the image, which I could not paste in the space allotted below.
This figure, from “Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium”, illustrates the effects of falling real interest rates, as seen in the U.S. since the 1980s (left panel). Initially, output rises (solid line, right panel), but simulations show it may fall over time. Though lower rates boost investment and capital (dashed line), they worsen capital allocation: less productive entrepreneurs bid up prices, crowding out more efficient but constrained firms. This reallocation effect ultimately reduces output (dotted line).