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Working Paper
The Impact of Covid-19 Related Policy Responses on Municipal Debt Markets
Municipal (muni) bonds are an important source of funding for state and local governments. During the Covid-19 pandemic, muni debt markets became severely distressed. In response, the Federal Reserve established the Municipal Liquidity Facility (MLF). Meanwhile, Congress enacted extensive fiscal measures that included direct aid to cities and states. To understand whether and how these policies worked, we employ a state-level regression model to estimate the relative efficacy of monetary and fiscal policy interventions for the term structure of muni-Treasury yield spreads. We find that fiscal ...
Working Paper
Should Capital Be Taxed?
We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Paper
Municipal Markets and the Municipal Liquidity Facility
Municipal bond markets experienced a significant amount of strain in response to the COVID-19 crisis, creating liquidity and credit concerns among market participants. During the economic shutdown resulting from the pandemic, income tax revenues were deferred and sales tax revenues decreased beginning in spring 2020, while the cost of borrowing significantly increased for municipal issuers. To aid municipal borrowing needs, the Federal Reserve implemented the Municipal Liquidity Facility (MLF) on April 9, 2020. In this analysis we describe the municipal market conditions as they evolved ...
Working Paper
Should Capital Be Taxed?
We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Paper
Unspanned macroeconomic factors in the yield curve
In this paper, we extract common factors from a cross-section of U.S. macro-variables and Treasury zero-coupon yields. We find that two macroeconomic factors have an important predictive content for government bond yields and excess returns. These factors are not spanned by the cross-section of yields and are well proxied by economic growth and real interest rates.
Journal Article
Government Debt in Domestic Hands During a Crisis
When banks load up on their government?s bonds, lending to firms and households can get crowded out. But when the sovereign debt market is in turmoil, such concentrations may play a surprising role.
Journal Article
Safe-Haven Performance in the Age of Bitcoin
In past periods of financial stress, investors seeking “safe havens” have shifted toward government bonds and gold. In recent years, some have questioned whether Bitcoin could also serve as a safe haven. We compare the behavior of government bonds, gold, and Bitcoin from January 1995 through February 2020 and find that the 10-year Treasury note behaved like a safe haven consistently, gold occasionally, and Bitcoin never. During March 2020, however, none of the assets can be classified with confidence as a safe haven.
Report
Trading activity in the Indian government bond market
We study how the Indian government bond market functions, how it has changed over time, and what factors help explain some of its features. Looking at the primary market, we describe how underwriting obligations are allocated to primary dealers via auction and identify several significant determinants of the underwriting commission cutoff rate, including the launch of the Negotiated Dealing System-Order Matching System (NDS-OM) electronic trading platform. Turning to the secondary market, we explore the importance of benchmark bonds, the launch of NDS-OM, the growth in trading activity, and ...
Working Paper
Why Are Banks Not Recapitalized During Crises?
I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction ...