Published Papers
A Q-Theory of Banks
with Juliane Begenau, Jeremy Majerovitz, Matias Vieyra
Draft • November 2024
Slides
This paper develops a dynamic model of banks that emphasizes the slow recognition of losses in accounting values. This feature explains four key empirical facts about banks: the discrepancy between market and book equity movements, especially during crises, the predictive power of the market-to-book ratio, the stability (instability) of the cross-sectional dispersion of book (market) leverage, and the protracted (immediate) response of book (market) leverage after net-worth losses. We argue that because capital requirements, meant to correct market inefficiencies, are based on delayed book accounts, they should be set jointly with accounting standards. Using an estimated version of the model, we show that faster loan-loss recognition can lead to welfare gains at more relaxed capital standards and can be better-targeted instruments for macroprudential policy.
Juliane Begenau, Saki Bigio, Jeremy Majerovitz and Matias Vieyra, “A Q-Theory of Banks” Review of Economic Studies, forthcoming
We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. Liquidity costs induce a value gap: a difference between the market price of a bond and the valuation of the bond using the government's discount factor. Optimal issuances are spread out across maturities and are dictated by the value gap scaled by a liquidity coefficient. This characterization allows us to quantify how the government's relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.
Saki Bigio, Galo Nuño, and Juan Passadore “Debt-Maturity Management with Liquidity Costs“ Journal of Political Economy: Macroeconomics, March 2023, Volume 1, Number 1, pages 119-190
Click here for the 2021 NBER Working Paper version that included an analysis of risk.
We develop a tractable model of banks' liquidity management with an over-the-counter interbank market to study the credit channel of monetary policy. Deposits circulate randomly across banks and must be settled with reserves. We show how monetary policy a ffects the banking system by altering the trade-o between pro ting from lending and incurring greater liquidity risk. We present two applications of the theory, one involving the connection between the implementation of monetary policy and the pass-through to lending rates, and another considering a quantitative decomposition behind the collapse in bank lending during the 2008 financial crisis. Our analysis underscores the importance of liquidity frictions and the functioning of interbank markets for the conduct of monetary policy.
Bianchi, Javier and Saki Bigio “Banks, Liquidity Management and Monetary Policy“ Econometrica, Jan 2022, Volume 90, Issue 1, pages 391-454.
Financial crises are particularly severe and lengthy when banks fail to recapitalize after bearing large losses. We present a model that jointly explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets subject to an information disadvantage. Large equity losses reduce a bank's capacity to sustain future losses. Losing this capacity leads to reductions in intermediation that exacerbate adverse selection. Adverse selection, in turn, lowers pro t margins, which explains the banks' failure to accumulate profits or attract equity injections. The model delivers financial crises that are infrequent and characterized by low and persistent economic growth.
Saki Bigio and Adrien D’Anvernas “Financial Risk Capacity” American Economic Journal: Macroeconomics, Vol. 13, no. 4., October 2021
We study how an economy's production structure determines the response of aggregate output and employment to sectoral financial shocks. In our framework, economic production is organized in an input-output network in which firms face financial constraints on their working capital. We show how sectoral financial shocks propagate through the network and manifest at the aggregate level through two channels: a fall in total factor productivity and an aggregate labor wedge distortion. The strength of each channel depends on the overall network architecture and the location of shocks. Finally, we calibrate our model to the U.S. input-output tables and use it to quantitatively assess the role of the network multiplier within the context of the recent Financial Crisis and the Great Recession.
Saki Bigio and Jennifer La’O “Distortions in Production Networks” The Quarterly Journal of Economics, Volume 135, Issue 4, November 2020, Pages 2187–2253,
In the aftermath of the Great Recession, macro models that feature financing constraints have attracted increasing attention. Among these, Kiyotaki and Moore (2012) is a prominent example. In this paper, we investigate whether the liquidity shocks and financial frictions proposed by Kiyotaki and Moore (2012) can improve the asset pricing predictions of the frictionless RBC model. We study the quantitative business cycle and asset pricing properties in an economy in which agents feature recursive preferences, are subject to a liquidity constraint, and suffer liquidity shocks. We find that the model predicts highly nonlinear time variation and levels of risk premia, which are driven by endogenous fluctuations in equity prices. However, the model fails to account for a basic fact: Periods of scarce liquidity are associated with high asset prices and low expected returns.
Bigio, Saki and Andrés Schneider (2017), “Liquidity Shocks, Business Cycles and Asset Prices" European Economic Review, Volume 97, August 2017, Pages 108-130
I study an economy where asymmetric information in the quality of capital endogenously determines the amount of liquidity available. Liquid funds are key to relax financial constraints on investment and employment. These funds are obtained by selling or using capital as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality which raise the cost of obtaining liquidity. The model can generate patterns for quantities and credit conditions similar to the Great Recession.
Bigio, Saki (2015), “Endogenous Liquidity and the Business Cycle” American Economic Review, Volume 105, Issue 6, June 2015, Pages 1883-1927.
How should the IRS enforce income taxes? This paper outlines a model to optimally audit entrepreneurs. The number of workers hired by each entrepreneur is assumed to be observable. We show that, when the monitoring strategy depends only on labor input, it is optimal to audit firms in a way that generates some empirical regularities, like the missing middle. Moreover, the optimal monitoring strategy is consistent with actual IRS practices.
Bigio, Saki and Eduardo Zilberman (2011), “Optimal Self-employment Income Tax Enforcement” Journal of Public Economics, Volume 95, Issues 9–10, October 2011, Pages 1021-1035.
I study a model that describes the policy of a Central Bank uncertain about whether currency depreciations cause output to expand (textbook model) or contract (balance-sheet model). When the private sector anticipates the Central Bank's policy and endogenously determines the model, Central Banks may fall in a learning trap. An increase in financial volatility provides an escape to such trap that replicates patterns in the data.
Bigio, Saki (2010), “Learning Under Fear of Floating” Journal of Economic Dynamics and Control, Volume 34, Issue 10, October 2010, Pages 1923-1950.
Published Comments
Comment: ``Business Cycle Asymmetry and Input-Output Structure: The Role of Firm-to-Firm Networks”
by Miranda-Pinto, Silva, and Young
Bigio, Saki (2023), commissioned by the Journal of Monetary Economics for the Carneggie-Rochester-NYU November 2023 Conference Issue
Comment: ``Optimal Supply of Public and Private Liquidity”
by Marina Azzimonti and Pierre Yared
Bigio, Saki (2019), commissioned by the Journal of Monetary Economics for the Carneggie-Rochester April 2018 Conference Issue
Comment: “The Fiscal and Monetary History of Peru``
Bigio, Saki (2019), commissioned by Lars Hansen and Juan Pablo Nicolini for the book The Fiscal and Monetary History of Latin America
Comment: “Leverage Restrictions in a Business Cycle Model”
Bigio, Saki (2014), in Macroeconomic and Financial Stability: Challenges for Monetary Policy, Conference Volumn, XVI Annual Conference of the Central Bank of Chile (Central Bank of Chile: Santiago, 2014).
In Collections
Non-linear effects of monetary policy and real exchange rate shocks in partially dollarized economies: an empirical study for Peru
by Saki Bigio and Jorge Salas
Bigio, Saki and Salas, Jorge (2006), in Money Afffairs, Volume XIX, Number 1.
Corrupción e indicadores de desarrollo en el Perú y el mundo: una revisión empírica
by Saki Bigio and Nelson Ramirez
Bigio, Saki and Nelson Ramierz (2017), “Corrupción e indicadores de desarrollo en el Perú y el mundo: una revisión empírica” Crecimiento económico en el Perú: causas y consecuencias Céspedes, N., N. Loayza and N. Ramírez Rondán (eds.), Universidad de San Martín de Porres Press, forthcoming.