Diego Friedheim

JOB MARKET PAPER

Lenders' Expectations and Sovereign Debt Crises Contagion

Abstract: This paper investigates how lenders' expectations may have fueled the propagation of the Greek crisis to other Eurozone periphery countries (i.e., Italy, Spain, Ireland, and Portugal). Using data from the Consensus Economics survey, I classify lenders by their GDP growth forecast precision before the crisis. During the crisis, less precise lenders adjusted their GDP growth and sovereign bond yield forecast against the rest of the Eurozone periphery relatively more than their more precise counterparts. Consequently, less precise lenders also shifted their portfolios away from the Eurozone periphery countries relatively more. In line with a model where some lenders rely on broad categories, such as the Eurozone periphery, the less precise lenders display a stronger GDP forecast correlation between Greece and other Eurozone periphery countries, driving these empirical results. By incorporating this mechanism into a two-country sovereign default model, I quantify that less precise lenders might have reduced Italian bond prices by almost 11 percent more than Bayesian lenders.

WORKING PAPERS

Banks' Inflation Expectations and Credit Allocation: the Fisher Effect With (Filippo De Marco)

Abstract: This work analyzes how lenders’ inflation expectations influence their credit allocation. Banks that expect higher inflation lend more credit volumes and at a lower interest rate to firms with higher leverage. These findings align with Fisher's (1933) insight that firms with significant leverage tend to benefit from an increase in inflation. Consequently, banks that expect these firms to perform better during inflationary periods are more willing to offer them better credit conditions.

Anchor Stabilization Plans and Exports Structure

Abstract:  Inflation has been a common issue in economic history. In an influenced work, Calvo and Vegh (1999) classified the government's plans to fight against inflation into monetary anchor or exchange rate anchor plans (ERAP) depending on whether the main plan's instrument is the interest rate or the exchange rate. Using all the inflation stabilization programs Calvo and Vegh (1999) classified as ERAP, I show that capital-intensive sectors increased their participation in total exports after implementing an anchor program. On the other hand, labor-intensive sectors decreased their participation. To explain this finding, I develop a multisectoral general equilibrium model. The model incorporates three types of sectors into the tradable sector (capital, labor, and land-intensive). This feature enables the model to reproduce this new empirical finding. In addition, the model can reproduce the main stylized facts presented in the inflation stabilization plan literature.

Work in Progress

• Sovereign Default Risk Contagion: The Tequila Crisis Effect on Argentina's Default Probability
• Banks' Inflation Expectations, Firm Cash Hold, and Markups (With Filippo De Marco)