Research

This paper provides a stylized framework to study the role of the United States as the International Lender of Last Resort to global banks. The model captures a central feature of the international financial system, namely, non-US global banks that invest heavily in US assets but are exposed to dollar liquidity shortages. This situation can give rise to multiple equilibria, one of which resembles a global financial crisis, with a sharp appreciation of the dollar, tighter financial conditions in international markets, weaker global economic activity, and struggling banks. The self-fulfilling nature of the crisis stems from a feedback loop between the exchange rate and the capacity of non-US banks to raise funds. Since the liquidity needs of these banks are often denominated in dollars, the Federal Reserve is better equipped than other central banks to prevent the "bad" equilibrium when the dollar is strong. However, its incentives to intervene -through swap lines- may not be aligned with the rest of the world, because of general equilibrium forces that drive larger and cheaper capital flows into the US during times of global financial stress.

Presented at: 2nd Sailing the Macro Workshop (Sep. 2022), Naples School of Economics PhD Workshop (Sep. 2022), BdF-BoE-BoI International-Macro Workshop (Nov. 2022), SAEe (Dec. 2022), CREi MacroLunch (May 2022/Mar. 2023), Université Paris Nanterre PhD Conference (Apr. 2023), LBS TADC (May 2023), Journal of International Economics Summer School (Poster, Jun. 2023), XXVI Workshop on Dynamic Macro (Jul. 2023), EEA (Aug. 2023), LSE-Oxford Workshop on International Macroeconomics and Finance (May 2024)

This paper analyses the interaction between macroprudential instruments using a dynamic stochastic general equilibrium (DSGE) for a small open economy with financial and nominal frictions. Using different objectives for the monetary authority, we try to find the optimal policy rules involving dynamic capital and reserve requirements. Given the frictions present in the model, the gains from adapting reserve and capital requirements to economic conditions are substantial, especially if financial stability is included as an objective of the Central Bank. Regarding the differences between the two instruments, the most important is that, contrary to capital requirements, an increase in reserve requirements leads to higher inflation and has an ambiguous impact on output. Finally, in the scenario of a financial stability objective and strict separation of tasks by instrument, reserve requirements provide a slightly better response to the exogenous shocks in the economy than capital requirements.