The Rise of Inelastic Intermediaries and Exchange Rate Dynamics, with Johannes Eugster and Pinar Yesin

Abstract
This paper investigates the interaction between the rise of inelastic intermediaries, e.g. mutual funds and exchange traded funds (ETFs), and exchange rate dynamics. By leveraging regulatory microdata on the universe of mutual funds domiciled in Switzerland, we first document the remarkable rise of the market share of this industry. Mutual funds went from holding 5% of domestic currency fixed income instruments in 2005 to 51% in 2024. We show that these intermediaries have strict mandates and trade only when faced with in(out)-flows. This makes the market more price-inelastic on aggregate in response to asset demand shocks. We develop an analytical model that we bring to the microdata. We find that (i) an inflow into domestic mutual funds with a large portfolio weight on the domestic currency appreciates it and (ii) the reduced aggregate elasticity makes the exchange rate more sensitive to capital flows. Finally, using a weekly panel of five advanced economies, we document the external validity of this mechanism. We show that the currencies whose markets see a higher prevalence of inelastic intermediaries react significantly more strongly to capital inflows.
[SNB Working Paper]

Financial Cooperation in a Fragmented World, with Javier Bianchi, Sebastian Horn and Cesar Sosa-Padilla

Abstract
This paper studies the effects of geopolitical risk on financial fragmentation and international risk-sharing based on a new dyadic dataset of official lending from 1910 to 2020. In periods of low geopolitical tension, official lending supports international risk-sharing by reallocating resources from low-risk to high-risk countries. When geopolitical risk is elevated, by contrast, official lending “fragments” and increasingly follows patterns of geopolitical alignment. This limits the effectiveness of global risk-sharing because aligned countries tend to have more correlated business cycles. To explain these patterns, we introduce geopolitical considerations into a limited-commitment model and show that, even with non-discriminatory default, higher geopolitical tensions redirect official lending toward aligned partners and worsen risk-sharing.
[December 2025 Paper]

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