Alberto Martin
CREI, UPF and BSE
- Macroeconomic Trends and the Efficiency of Financial Markets (2021)
ERC Advanced Grant
In recent years, my research has tried to understand the key drivers and macroeconomic effects of an economy’s stock of collateral, i.e., of its ability to pledge future income to back financial promises. But there is a crucial aspect of the problem that deserves further study. In a world of heterogeneous agents, what matters for the efficiency of financial markets is not just the overall stock of collateral, but also its distribution across firms, sectors and countries. Moreover, this distribution is largely endogenous, as it is determined by equilibrium forces and is bound to change when the economy does.
In this project, I study three major ongoing shifts in the global economy and their implications for the distribution of collateral and the efficiency of financial markets:
First, I focus on the sustained decline in real interest rates that has characterized the global economy over the past few decades. I show how, in a world of heterogeneous agents and financial frictions, falling interest rates may actually reduce the efficiency of financial markets and even lead to lower economic growth. As it turns out, it may even be counterproductive to reduce interest rates in the midst of a financial crisis!
In a second set of projects, I focus on the recent rise of corporate earnings and markups in much of the advanced world. Although there is substantial research on the origin and macroeconomic effects of higher markups, we know little about their effects on the efficiency of financial markets. I explore this relationship and show that the rise of market power may account for the higher level and volatility of asset prices over the past few decades.
The last part of the proposal deals with the role of geopolitics on capital flows. It is motivated by the observation that both large waves of financial globalization, in the late 19th and 20th centuries, took place under the shadow of a single hegemonic power. In a third set of projects, I explore the relationship between the existence of a hegemon and financial globalization, and study how an increase in competition among global powers (e.g. the rise of China) affects the size and composition of international capital flows.
- The Macroeconomics of Collateral (2013)
ERC Consolidator Grant
Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e., lenders) to those who can put them to productive use (i.e., borrowers). The defining feature of these markets is that they entail the exchange of goods today for a borrower’s promise to deliver goods in the future. These promises are sustained by guarantees, which are akin to the amount of future income that borrowers can credibly pledge to lenders. I refer to this pledgeable income as an economy’s stock of collateral. This stock determines the amount and type of promises that can be traded in an economy and, in turn, this set of promises determines the transactions that can be carried out. Intuitively, when this set of promises is large, resources find their most productive uses and efficiency is high.
This raises a general question: what are the key determinants of the set of promises that an economy is able to sustain, and why does it vary?
In macroeconomic models, it is commonly assumed that all promises are backed by only one kind of collateral, i.e. usually that of private borrowers, and that this collateral is ‘fundamental’, i.e. it consists of output. Real-world financial markets, however, rely on many types of collateral to guarantee promises. In this proposal, I focus on three such types. First, collateral may be ‘bubbly’, i.e. promises can be backed by nothing else but the income that the sale of new promises is expected to bring in the future. Second, collateral need not be private, as government promises are sustained by pledging public income. Third, collateral need not be homogenous, as it may differ in quality or type across entrepreneurs, and this quality may not be perfectly observed by all. I address the following broad questions. How do economies produce these different types of collateral? How do they interact with one another? Is there a role for policy in maintaining the efficient level and composition of collateral?