work in progress

We study convenience yields in green bonds. We show green bonds carry higher interest-rate risk-exposure than conventional comparable bonds. Shocks that steepen the term-structure of interest rates causes green bonds prices to fall by more than comparable conventional bonds. We measure and document this for different green bonds term-structures using no-arbitrage pricing models. We develop a general theory that can rationalize these pricing patterns whenever the non-pecuniary benefits underlying green bond convenience yields scales with the market-value of asset holdings, as occurs with investment mandates for green assets. Our findings show that assets providing convenience benefits can have distinct interest-rate risk exposure, with potentially quantitatively significant effects on optimal issuance as well as portfolio choices by investors. In particular, the greenium for long-duration assets is smaller due to higher risk-premia.

What is the impact of inflation on the supply side of the banking sector? This paper draws lessons on the relationship between banking and inflation by exploring the Brazilian hyperinflationary period during the 1990s and its sharp disinflation following the Real Plan in 1994. We formalize how banks can extract rents by issuing deposits and how inflation impacts these rent dynamics leading to the entry/bankruptcy (merger) of banks. The model has three key features: (i) interest-bearing private money (deposits) that compete with public money (currency) in households’ liquid asset portfolio choice; (ii) heterogeneous productivity banks in supplying loans; (iii) banks’ market power in the deposits market. When inflation and nominal rates rise banks can extract more rents from depositors, allowing for the survival of low-productivity banks dependent on inflation profits. We derive conditions under which the existence of too-low productivity banks is inefficient and a regulator would prefer to keep them outside the banking market. Consistent with the data, when inflation drops banks benefit in the short-run due to re-evaluation of the assets, but the long-run effects of lower inflation rents lead to the exit and a more concentrated banking system. Using disaggregated bank balance sheet data, we construct a model-based index of banks’ long-run reliance on inflation and show that it predicts exit of banks following disinflation.

We develop a continuous-time macro-finance model with price stickiness and household disagreement on economic fundamentals. These generate an endogenous distribution of inflation expectations. We calibrate the model to match the time-varying dispersion of inflation expectations observed in the data. We use the model to study how optimal policy differs in the presence of endogenous inflation disagreement.

Many economic problems in macro-finance involve default decisions by heterogeneous agents. This paper proposes a deep learning based method to solve high dimensional rational expectations default models. The method can accurately solve for complex default boundaries in high-dimensional state spaces. We provide an application to a model with heterogeneous banks with rich balance sheet details and different customer base.