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Work in Progress

“The granular origins of the Global Financial Cycle”, with Nicola Benigni (UZH), Torsten Ehlers (IMF), Boris Hofmann (BIS) and Christian Schmieder (BIS).

“Branch Banking and Regional Financial Markets:  Evidence from Prewar Japan”, with Toshihiro Okubo (Keio)  and Tetsuji Okazaki (U Tokyo).

“Super Debt Cities: Local government finance and the geography of China’s housing boom” with Yi Huang  (Fudan University) and Ye Zhang (University of Geneva).


Completed Working Papers

NEW: Growing Like Germany: Local public debt, local banks, low private investment (with Michael Stiefel (UZH) and Iryna Stewen (JGU Mainz)). Updated February 2023. Earlier versions appeared as Bank of Finland discussion paper 09/2022, UZH-DP 380, CESifo-DP 9496 and CEPR-DP 15912.

The upshot:  Local government debt in Germany crowds out private investment to the tune of 1 percent of GDP per year. The reason: Forced to lend to local governments by their statutory mandate, local public banks try to  “make up” for the low-yields on municipal debt by charging SME higher rates in what are locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, as we argue, is a direct consequence of the debt brake at the federal and state levels which shifted a lot of expensive government task to municipalities.

Our VoxEU policy brief on this paper.

Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock (with Lilia Ruslanova), September 2020, updated April 2021.

The upshot: U.S. state-level banking deregulation during the 1980s  considerably dampened the fallout on local economies of the China trade shock a decade later. The reason: households in financially integrated areas could more easily borrow against their housing wealth to smooth consumption. This kept house prices and wages in the non-tradable sector up, facilitating labor reallocation away from manufacturing.

Non-US  banks and dollar (co-)dependence:  how housing markets became internationally synchronized with Torsten Ehlers (BIS) and Alexander Raabe (European Stability Mechanism) now out as BIS-DP no 897.

The upshot: Why do  House Prices move together across countries? US capital inflows ease Dollar funding conditions for non-US global banks, which increases their lending globally. This drives mortgage supply and synchronizes house prices internationally.



Publications in Refereed Journals

Small Firms and Domestic Bank Dependence in Europe’s Great Recession with Egor Maslov (UZH) and Bent Sørensen (U Houston) accepted for publication, Journal of International Economics.  

The upshot: After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of ‘double-decker’ banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them.

Replication files:

Earlier versions: UZH-DP 397, CAMA WP 76/2019 , CESifo-WP 7897 CEPR-DP 13691, European Economy Discussion Paper

By a Silken Thread: regional banking integration and  credit reallocation during Japan’s lost decade (with Toshihiro Okubo),   Journal of International Economics, Vol. 137, July 2022.

The upshot: During Japan’s Lost Decade, regional credit reallocation by nationwide (“integrated”) banks mitigated the real effects from the bank liquidity shock in prefectures with many bank-dependent SMEs. We propose a novel instrument for regional banking integration that  exploits the historical segmentation of banking markets in Japan which  goes back to the institutions set up for silk export finance in the late 19th century. Our results show how integrated banking markets limit macroeconomic asymmetries in a monetary union during a financial crisis–even if the crisis mainly affects  integrated banks (as was the case  during the Lost Decade).

Last author version and replication files are available here:

Earlier versions where circulated as “By a Silken Thread: regional banking integration and  pathways to financial development during Japan’s Great Recession’ Working paper versions: RIETI CESifo CAMA

Holes in the Dike: the global savings glut, U.S. house prices and the long shadow of banking deregulation, (with Iryna Stewen, University of Mainz). Journal of the European Economic Association, Volume 18, Issue 4, August 2020, pp. 2013–2055.

The upshot: The global savings glut (i.e capital flows from China and other emerging economies into the U.S.) contributed significantly to the rise and fall of U.S. house prices prior and during the great financial crisis. For identification, we exploit that interstate banking deregulation during the 1980s—a decade prior to the savings glut—cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1997–2012. We use bank-level data to identify the mechanism behind this stylized fact: capital inflows relaxed the value-at-risk constraints of geographically diversified (“integrated”) U.S. banks more than those of local banks. Hence, mortgage credit expanded more in states where integrated banks had a relatively bigger market share (due to early deregulation).

Replication Files are here:

Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve? (with Egor Maslov, Iryna Stewen and Bent E. Sorensen), IMF Economic Review, Volume 67, Issue 3pp 443–495.

The upshot: Risk sharing in the EMU collapsed during the eurozone crisis. We show that one important reason for this was that  there was too little direct (i.e. bank-to real sector) cross-border banking integration and too much interbank integration.  Interbank integration, leaves firms and households fully exposed to idiosyncratic banking sector shocks and therefore does not provide risk sharing benefits during financial crises. Conversely, direct banking integration helps risk sharing by allowing the real sector to diversify its funding sources. We find that  equity market integration (‘capital market union’)  and (direct) banking integration (‘banking union’) are complements: firm’s access to cross-border credit helps stabilize labor income and investment  in the face of country-specific shocks while making firms’ profits more volatile. Better equity market integration then contributes to internationally diversify  increased fluctuations in profits.

Media Coverage:  Martin Sandbu covered our paper in the  Financial Times
The last author version is here. A previous version was also circulated as CEPR discussion paper #13254 under the title: Are Banking and Capital Markets Union Complements? Evidence from Channels of Risk Sharing in the EMU.

Systematic Consumption Risk in Currency Returns (with Rahel Studer-Suter), Journal of International Money and Finance, Volume 74, June 2017, Pages 187-208.

The upshot: Sorting currencies on past consumption growth is equivalent to sorting them on interest rates: during normal times, high past-consumption-growth currencies appreciate more (depreciate less) than uncovered interest parity would imply. This is a risk premium because these currencies also depreciate strongly during global shocks. We explain our findings in a quantitative model of habit formation in consumption: countries with high past consumption growth have low risk aversion (i.e. a high risk absorption capacity) and high interest rates. Efficient risk sharing implies that countries with lower risk aversion bear larger drops in consumption in globally bad times. This is achieved through a depreciation of these currencies, which effectively transfers  purchasing power to countries with low risk bearing capacity.

Working paper versions: Final manuscript version, CES, UZH

A provincial View of Global Imbalances: Regional Capital Flows in China (with Samuel Cudré, Mc Kinsey & Co) Review of World Economics, , Volume 153, Issue 3, pp 573–599.

The story: This piece zooms in on the drivers of province-level capital flows in China. They are much the same as those driving aggregate flows (see my 2013 JIMF paper below): expected rising prices of non-tradables such as housing, education, social services, to a lesser extent future investment growth. In addition to the earlier paper, here we can exploit the heterogeneity of capital flow patterns across provinces and and correlate them with province-level characteristics. The results buttress the view that the usual-suspect financial frictions (“savings wegdes”), such as lack of access of private firms to credit, a lack of domestic investment opportunities for households etc. drive surpluses.

Working Paper versions: Last manuscript version, CAMA, UZH

The Consumption-Income Ratio, Entrepreneurial Risk and the US Stock MarketJournal of Money, Credit and Banking, Sep. 2014, vol 46 (6), pp. 1259-1292.Download (PDF, 459 KB)

The upshot:  The paper shows that variation in the aggregate U.S. consumption-income ratio is dominated by variation in entrepreneurial income and predicts excess returns on the U.S. stock market. This pattern is consistent with an entrepreneurial risk mechanism of asset pricing in which fluctuations in the non-hedged business risk of wealthy entrepreneurs (who are also an important group of owners of public equity) leads to variation in risk appetite and thus in stock prices.
Consistent with this mechanism, I find that the link between stock prices and the entrepreneurial consumption-income ratio has weakened as access to finance for entrepreneurs has improved following U.S state-level banking deregulation in the 1980s and as stock-ownership has become more dispersed with the advent of mutual funds and investment vehicles such as 401 k pension plans. 

Formerly circulated under ‘Proprietary Income, Entrepreneurial Risk and the Predictability of U.S. Stock Returns’, CESifo Working Paper No. 1712

What drives China’s Current Account?Journal of International Money and Finance, Feb. 2013, vol 32, pp. 856-883.

Short answer: primarily, expected real appreciation, i.e. expected rising prices of non-tradables such as housing, education, social services. To a lesser extent future investment growth. This pattern suggests that factors related to China’s domestic development (and that induce firms and households to save for precautionary reasons and primarily in housing markets rather than in other sassets) account for China’s persistent surpluses until the global financial crisis.

Securitization of Mortgage Debt, Domestic Lending and International Risk Sharing (with Thomas Nitschka), Canadian Journal of Economics, May 2012, vol 45 (1), pp. 493-508.

The story: Securitization of mortgage debt is a good idea in prinicple because it makes risks internationally tradable that were hitherto local and non-diversifiable: housing. We show that U.S. sales of securitized mortgage debt actually helped global risk sharing when credit was abundant prior to the global financial crisis but that this mechanism broke down when credit dried up during the global financial crisis.


Has Risk Sharing increased in Asia (and elsewhere)?Seoul Journal of Economics, 2011, vol 24 (4), pp. 551-574.

4 Answers:

i) consumption risk sharing seems to have increased among industrialized countries but much less in
the emerging world.

ii) The increase in risk sharing is generally found to be stronger in studies that focus on the trends rather than purely cyclical variation in the data.

iii) globalization has not only affected consumption responses to output shocks but also the structure of
these shocks themselves. This, in turn, has affected the measurement of risk sharing.

iv) Taking stock of ii) and iii), I show that risk sharing in East Asia has started to increase once the region had recovered from the Asian crisis in the late 1990s.

The Home Bias, Capital Income Flows and Improved Long-Term Consumption Risk Sharing between Industrialized Countries, with Michael J. Artis, International Finance,Winter 2011, vol 14 (3), pp. 481-505. Download (PDF, 205 KB) 

Story: Is financial globalization associated with improved international consumption risk sharing?  We argue that, theoretically, the impact of financial globalization should show up first and most robustly in the lower frequencies of the data  and we show that this is the case empirically: by the end of our sample period (1960–2007), up to 40% of long-term idiosyncratic consumption risk is shared between industrialized countries – as compared to less than 10% before 1990. This dramatic increase is associated with a huge increase in international capital income flows: while capital income flows remain relatively limited as a channel of risk sharing at business-cycle horizons, their contribution to international risk sharing at longer horizons has increased substantially. Much of this increase can be attributed to the growth in international asset positions over the recent globalization period.

Formerly circulated under: ‘The Home Bias and Capital Income Flows between Countries and Regions’, Mar. 2007, IEW Working Paper 316, University of Zurich.

Consumption Risk Sharing over the Business Cycle: The Role of Small Firms’ Access to Credit Markets, with Iryna Shcherbakova-Stewen. The Review of Economics and Statistics, Nov. 2011, 93(4), pp. 1403-1416.

Replication & data files

The upshot: Consumption risk sharing among U.S. federal states is procyclical — it increases in U.S.- wide booms and decreases in U.S.-wide recessions. These business cycle fluctuations in inter-state risk sharing are driven mainly by states in which small businesses account for a large share of income or employment. State-level banking deregulation during the 1980s loosened the dependence of interstate risk sharing on the business cycle, mainly through its impact on states with many small firms. Our results establish a major benefit from bank deregulation: small firms’ access to credit and, with it, interstate risk sharing have improved mainly when it is most urgently needed: in nationwide economic downturns. This finding has implications for the design of banking union in Europe that we flesh out in our companion piece on

The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors (with Rahel Suter), Swiss Journal of Economics and Statistics, Mar. 2010, vol 146 (I), pp. 349-371.

The upshot: Simple asset pricing implies that differences in currency risk premia (aka: persistent deviations from uncovered interest parity) across countries reflect differential exposures of these countries’ exchange rates to global shocks. We explore the implications of this logic for the Swiss Franc and for Swiss Monetary policy. The Swiss franc exchange rate is a a “small” safe-haven currency and therefore particularly prone to global shocks. While the franc’s role as a safe haven has fluctuated over time and across currency pairs, the importance of global shocks for the franc’s exchange rate imposes additional constraints on Swiss monetary policy.

Equity Fund Ownership and the Cross-Regional Diversification of Household Risk, (with Sascha O. Becker), Journal of Banking and Finance, Jan. 2010, vol 34 (1), pp 90-102.

The question: Would wider equity ownership help  improve inter-regional consumption risk sharing between households? We use data from the Italian Survey of Household Income and Wealth to show that it would. Mutual equity funds are usually diversified at the national level. Cross-regional patterns of equity fund ownership are qualitatively consistent with simple portfolio theory: regions with more asymmetric business cycles are more diversified because they have higher fund participation rates (the extensive margin of diversification) and higher average holdings of equity funds (diversification’s intensive margin). Also, fund holdings increase with the exposure of non-tradable income components (such as labor or entrepreneurial income) to regional shocks. We conclude: yes, increased equity market participation could substantially improve interregional risk sharing.

Real Exchange Rates and Real Interest Rate Differentials: a Present Value Interpretation (with Ronald MacDonald), European Economic Review, Nov. 2009, vol 53 (8), pp 952-970.

Financial Globalization, International Business Cycles and Consumption Risk Sharing (with Michael J. Artis),  Scandinavian Journal of Economics, Sep. 2008, vol 110 (3), pp 447-471.

The Lack of International Consumption Risk Sharing: Can Inflation Differentials and Trading Costs Help Explain the Puzzle?, Open Economies Review, 2008, vol.19(2), pp.183-201.

Consumption, Wealth and Business Cycles: Why is Germany different?  (with Britta Hamburg and Joachim Keller), Empirical Economics, Jun. 2008, vol 34(3), 451-476.

CAYGermanData (XLS, 28 KB)

Intra- and International Risk-Sharing in the Short Run and the Long Run (with Sascha O. Becker), European Economic Review, Apr. 2006, vol. 50(3), pp.777–806.

International Capital Mobility in the Short Run and the Long Run: Can we still learn from savings and investment data?, Journal of International Money and Finance, Feb. 2004, vol. 23(1), pp. 113-131.

International Macroeconomic Fluctuations and the Current Account, Canadian Journal of Economics, May 2003, vol. 36(2), pp. 401-420.

Long-Run Recursive VAR Models and QR Decompositions, Economics Letters, Oct. 2001, vol. 73(1), pp. 15-20.

The Relative Dynamics of the Current Account and Investment in the G7 Economies, The Economic Journal, May 2001, vol. 111(471), pp. C148-C163.


Book contributions

Shocks and risk sharing in the EMU: Lessons for Banking and Capital Market Union (2018). (with Egor Maslov, Bent Sørensen, and Iryna Stewen) In N. Campos & J.-E. Sturm (Eds.), Bretton Woods, Brussels, and Beyond: Redesigning the Institutions of Europe (pp. 85-92) book

‘The Impact of the Euro on International Stability and Volatility’ with Stefan Gerlach. In: Marco Buti , Servaas Deroose , Vitor Gaspar and João Nogueira Martins (eds). The Euro: the first decade. Cambridge University Press, pp. 648-670, April 2010.  Earlier version: European Economy, Economic Papers, 309, March 2008

‘Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration’, with Micheal Artis. In Lars Jonung, Christoph Walker and Max Watson (eds.) Building the Financial Foundations of the Euro: Experiences and Challenges, Routledge, June 2008.

previous version, CEPR Discussion Paper 6617, Dec. 2007

Comment on Michael D. Bordo and Thomas F. Helbling ‘Have National Business Cycles become more synchronized?’ in Siebert, Horst (ed.) Macroeconomic Policies in the World Economy, Springer Verlag (Berlin and Heidelberg), 2004.