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    Research Interests

Public Finance, Public Economics, Macroeconomics, Monetary Economics, Financial Economics.

   Working Papers

Foreign Currency Borrowing by Small Firms   new version July 2008

old version published as Tilburg University CentER Discussion Paper No. 2008.16

Abstract: 

We examine the firm-level and country-level determinants of the currency denomination of small business loans. We introduce an information asymmetry between banks and firms in a model that also features the trade-off between the cost of debt and firm-level distress costs. Banks in our model don’t know the currency in which firms have contracted their sales. When foreign currency funds come at a lower interest rate, all foreign currency earners and those local currency earners with low distress costs choose foreign currency loans. With imperfect information in the model concerning the currency in which the firms receive their earnings, even more local earners switch to foreign currency loans as they do not bear the full cost of the corresponding credit risk.

We test these implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries that contains reports on 3,105 recent bank loans. We find that firms with foreign currency income and assets are more likely to borrow in foreign currency. In contrast we find only weak evidence that firm-level distress costs and financial opaqueness affect currency denomination. Interest rate advantages on foreign currency funds and exchange rate volatility partly explain differences in loan dollarization across countries, but not within countries over time. We find that country-level measures of information asymmetries (weak corporate governance and strong foreign bank presence) do encourage foreign currency borrowing, but only by foreign currency earning firms. All in all, we cannot confirm that information asymmetries and currency speculation are a key driving force of the recently observed increase in the dollarization of small business loans in Eastern European transition countries.

Keywords: foreign currency borrowing, competition, banking sector, market structure.

JEL Classification Numbers: G21, G30, F34, F37.

Financing Government Expenditures Optimally

Study Center Gerzensee Working Paper 06.01, 2006.

Abstract:  In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.

Keywords: Optimal Interest Rates, Tax Collection Costs, Tax Evasion, Friedman Rule, Cash-intensive Informal Sector, Inflationary Finance.

JEL Classification Numbers: E63, H21, H26
 

Tax Collection Costs, Tax Evasion and Optimal Interest Rates

Study Center Gerzensee Working Paper 04.02, 2004 (revise and resubmit to the Journal of Monetary Economics).

Abstract: I investigate to what extent the cross-country variation in nominal interest rates can be explained as being due to governments' optimal response to economic conditions such as tax collection costs, tax evasion and government consumption needs. In particular, I study the effects of costly income taxes in the presence of an informal sector on the solution to a Ramsey problem in a general equilibrium framework. Unlike most of the previous analyses of optimal inflationary finance, the model postulates that conventional taxes carry collection costs whereas fiat money can be printed costlessly.

For some countries, I measure tax collection costs, use the tax evasion estimates reported in the literature, and then calculate the optimal interest rate based on the model. Comparison of the actual and optimal interest rates demonstrates that the model can in fact partly explain the observed deviations from the Friedman Rule. I also show that allowing cross-country differences in the elasticity of substitution between formal and informal sectors can increase the model's explanatory power.

Keywords: Optimal Interest Rates, Tax Collection Costs, Tax Evasion, Friedman Rule.

JEL Classification Numbers: E63, H21, H26

Income Inequality and Inflation: A Vicious Cycle

Joint with Maria Rueda Maurer, under revision.

Abstract: Using a new and extensive data set for income inequality, we provide empirical evidence that not only inflation has worsened inequality, but also inequality has lead to inflation. The interdependence arises because inflation can be the government's optimal response to inequality for its redistributive effects or due to high tax resistance in an unequal society. We conclude that income inequality is not only a potential policy objective, but it may also be a variable determining policy decisions and their outcomes, including monetary policy.

Keywords: Income Inequality, Inflation, Panel Estimation.

JEL Classification Numbers: D30, E31, C33

Implications of Tax Collection Costs in Different Monetary Models

Mimeo, University of Minnesota, 2003.

Abstract: I study the effects of tax collection costs on the optimal inflation tax in different monetary models and compare their theoretical implications.

 Publications

The Recent Behaviour of Financial Market Volatility

BIS Paper, No. 29, August 2006, Bank for International Settlements, joint with F. Panetta, P. Angelini, A. Levy, G. Grande, R. Perli, S. Gerlach, S. Ramaswamy, M. Scatigna.

Same version also published as Banca d'Italia Occasional Paper, No. 2, August 2006.

Abstract: A striking feature of financial markets behaviour in recent years has been the low level of price volatility over a wide range of financial assets and markets. The issue has drawn the attention of central bankers and financial regulators due to the potential implications for financial stability. This paper makes an effort to shed light on this phenomenon drawing on literature surveys, reviews of previous analyses by non-academic commentators and institutions and some new empirical evidence.

The paper consists of seven sections. Section 2 documents the current low level of volatility, putting it into a historical perspective. Section 3 briefly reviews the theoretical determinants of volatility, with the aim of helping the reader through the subsequent sections of this Report, which are devoted to the explanations of the phenomenon under study. These explanations have been grouped into four categories: real factors; financial factors; shocks; and monetary policy. Thus, Section 4 looks into the relation between volatility and real factors, both from a macro- and a microeconomic perspective. Section 5 considers how the recent developments in financial innovation and improvements in risk management techniques might have contributed to the decline in volatility. Section 6 considers the relation between real and financial shocks and volatility. Finally, Section 7 explores whether more systematic and transparent monetary policies might have led to lower asset price volatility.

Keywords: Financial volatility, Risk Taking, International Financial Markets.

JEL Classification Numbers: G1,G2

What the Financial Times has said on this study on Sept 22, 2006, on Sept 29, 2006, on Oct 2, 2006, and on Jan 24, 2007.

What the Economist has said on this study on Oct 5, 2006.

    Research in Progress

"Tax Evasion as a Coordination Failure"