Monopsony, Income Risk and R∗ Multiplicity, with A. Cesa-Bianchi , S. De Ferra , A. Ferrero , A. Kohllas and F. Romei

Abstract
We develop a model where labor market monopsony and income risk generate multiple equilibria for the equilibrium real interest rate, R∗. Firms’ debt issuance amplifies labor income risk, making household asset demand non-monotonic. One equilibrium features higher R∗ and lower risk; another, lower R∗, higher debt, and higher risk. Policy affects equilibrium selection: central bank asset purchases lower R∗, while government debt raises it. Empirical evidence supports our prediction that asset supply changes have differing effects on interest rates before and after the Global Financial Crisis.
[CEPR Discussion Paper]

Dominant Currency Pricing Transition, with Marco Garofalo and Roger Vicquery

Abstract
We explore an episode of aggregate transition to dominant currency pricing in a large developed economy, relying on transaction-level data on the universe of UK trade between 2010 and 2022. Until 2016, the majority of UK non-EU exports were invoiced in British pounds, the ”producer” currency. However, in the aftermath of the June 2016 Brexit referendum and the subsequent depreciation of the pound, the share of non-EU UK exports invoiced in pounds started to sharply decrease – by more than 20 percentage points. This was mirrored by an increase of similar magnitude in the share of US dollar invoicing, which by 2019 overtook the pound as the main non-EU export invoicing currency. Using shift-share and event-study identification strategies, we show that large foreign-exchange movements can generate a transition in invoicing choices for firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that that this currency-mismatch valuation channel accounts for most of the transition away from producer currency pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that this shift in export pricing paradigm has important aggregate consequences for export pass-through and the allocative effects of price rigidities. Exports exhibit significantly higher elasticity to USD exchange-rate movements after the Brexit referendum: a USD dollar appreciation depresses demand for exports by twice as much than before this ‘dominant currency pricing transition’.
[Bank of England Working Paper] [Slides] (covered by the Financial Times and Alternatives Economiques)

Sanctions and Currencies in Global Credit, with Marco Garofalo and Roger Vicquery

Abstract
This paper studies the effect of financial sanctions on the dominance of the US dollar in global credit markets. In the aftermath of the invasion of Crimea in 2014, sanctions imposed by both the US and the EU restricted the provision of financial services to Russian firms. We document how, between 2014 and 2021, the share of global cross-border credit to Russia denominated in US dollars declined from 65% to 25%, while the share denominated in euros rose from 20% to 45%. Relying on confidential bank-level data covering the universe of global banks located in the UK, we show that this shift was driven by banks previously lending to Russia in US dollars, and that banks shifted to euro lending to Russia regardless of whether their ultimate owner was based in a sanctioning jurisdiction or not. We argue that this euroisation relates to an increase in the relative “settlement risk” of US dollar claims, in the context of US extra-territorial sanctions targeting the dollar payment system. We rationalise our findings in a three-country model with financial intermediaries, where sanctions are introduced as both jurisdiction and currency-circuit specific frictions.
[Oxford Working Paper] [Slides]

Work in Progress