Published Papers
Portfolio Choice and Settlement Frictions: A Theory of Endogenous Convenience Yields
with Javier Bianchi
Journal of Economic Theory, forthcoming
Draft • November 2025
Codes on GithubAbstract. We study settlement frictions that arise from the need to finance negative balances through an over-the-counter (OTC) market. We derive a closed-form expression for the endogenous convenience yield and show how it can be incorporated into a canonical portfolio problem. Using this framework, we examine how shifts in settlement frictions affect liquidity premia, the volume of overnight funding, the dispersion of market rates, and optimal portfolio allocations. From a normative perspective, we show that in the competitive equilibrium, investors may either over- or under-invest in liquid assets; moreover, both higher risk aversion and tighter aggregate liquidity increase the likelihood of under-accumulation.
Formerly titled “Portfolio Theory with Settlement Frictions.”
Carbon Pricing and Inequality: A Normative Perspective
with Diego R. Känzig & Pablo Sanchez & Conor Walsh
Economic Journal, forthcoming
Draft • October 2025
Abstract. Despite broad acceptance among economists, carbon taxes face persistent public resistance. We measure the sources and distribution of welfare losses from unexpected European carbon price changes by estimating their impact on consumer prices, labor income, financial wealth, and government transfers. A 1% carbon-policy-induced increase in energy prices yields an average welfare loss of about 0.5% of annual consumption, primarily driven by indirect labor-income effects. Younger, poorer, and less educated households, especially in Southern and Eastern Europe, bear a disproportionate burden. These findings suggest public opposition to carbon taxes stems from legitimate distributional concerns.
Repurchase Options in the Market for Lemons
with Liyan Shi
Review of Economic Studies, forthcoming
Draft • March 2025
Abstract. We study repurchase options (repo contracts) in a competitive asset market with adverse selection. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trades. In equilibrium, a single repo contract pools all assets. The embedded repurchase option mitigates adverse selection by improving the volume of trades relative to outright sales. However, liquidity provision can be inefficiently low as lenders compete to attract high-quality assets via high haircuts and low rates. The equilibrium has a closed form and aligns well with empirical patterns across Mortgage-Backed Securities repos.
Online Appendix: This Online Appendix covers the repo market equilibrium under competitive search and Riley equilibria, as well as other extensions to the baseline model.
A Q-Theory of Banks
with Juliane Begenau, Jeremy Majerovitz, Matias Vieyra
Draft • November 2024
Slides
Juliane Begenau, Saki Bigio, Jeremy Majerovitz and Matias Vieyra, “A Q-Theory of Banks” Review of Economic Studies, Volume 93, Issue 1, January 2026, Pages 106–143
Abstract. This paper develops a dynamic model of banks that emphasizes the slow recognition of losses in accounting values. This feature explains four key empirical facts about banks: the discrepancy between market and book equity movements, especially during crises, the predictive power of the market-to-book ratio, the stability (instability) of the cross-sectional dispersion of book (market) leverage, and the protracted (immediate) response of book (market) leverage after net-worth losses. We argue that because capital requirements, meant to correct market inefficiencies, are based on delayed book accounts, they should be set jointly with accounting standards. Using an estimated version of the model, we show that faster loan-loss recognition can lead to welfare gains at more relaxed capital standards and can be better-targeted instruments for macroprudential policy.
Debt-Maturity Management with Liquidity Costs
with Galo Nuño and Juan Passadore
Saki Bigio, Galo Nuño, and Juan Passadore “Debt-Maturity Management with Liquidity Costs“Journal of Political Economy: Macroeconomics, March 2023, Volume 1, Number 1, pages 119-190
Abstract. We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. Liquidity costs induce a value gap: a difference between the market price of a bond and the valuation of the bond using the government's discount factor. Optimal issuances are spread out across maturities and are dictated by the value gap scaled by a liquidity coefficient. This characterization allows us to quantify how the government's relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.
Click here for the 2021 NBER Working Paper version that included an analysis of risk.
Banks, Liquidity Management and Monetary Policy
with Javier Bianchi
Bianchi, Javier and Saki Bigio “Banks, Liquidity Management and Monetary Policy“Econometrica, Jan 2022, Volume 90, Issue 1, pages 391-454.
Abstract. We develop a tractable model of banks' liquidity management with an over-the-counter interbank market to study the credit channel of monetary policy. Deposits circulate randomly across banks and must be settled with reserves. We show how monetary policy affects the banking system by altering the trade-off between profi ting from lending and incurring greater liquidity risk. We present two applications of the theory, one involving the connection between the implementation of monetary policy and the pass-through to lending rates, and another considering a quantitative decomposition behind the collapse in bank lending during the 2008 financial crisis. Our analysis underscores the importance of liquidity frictions and the functioning of interbank markets for the conduct of monetary policy.
Financial Risk Capacity
with Adrien D’Anvernas
Draft
Saki Bigio and Adrien D’Anvernas “Financial Risk Capacity” American Economic Journal: Macroeconomics, Vol. 13, no. 4., October 2021
Abstract. Financial crises are particularly severe and lengthy when banks fail to recapitalize after bearing large losses. We present a model that jointly explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets subject to an information disadvantage. Large equity losses reduce a bank's capacity to sustain future losses. Losing this capacity leads to reductions in intermediation that exacerbate adverse selection. Adverse selection, in turn, lowers profi t margins, which explains the banks' failure to accumulate profits or attract equity injections. The model delivers financial crises that are infrequent and characterized by low and persistent economic growth.
Distortions in Production Networks
with Jennifer La'O
Saki Bigio and Jennifer La’O “Distortions in Production Networks” The Quarterly Journal of Economics, Volume 135, Issue 4, November 2020, Pages 2187–2253
Abstract. We study how an economy's production structure determines the response of aggregate output and employment to sectoral financial shocks. In our framework, economic production is organized in an input-output network in which firms face financial constraints on their working capital. We show how sectoral financial shocks propagate through the network and manifest at the aggregate level through two channels: a fall in total factor productivity and an aggregate labor wedge distortion. The strength of each channel depends on the overall network architecture and the location of shocks. Finally, we calibrate our model to the U.S. input-output tables and use it to quantitatively assess the role of the network multiplier within the context of the recent Financial Crisis and the Great Recession.
Liquidity Shocks, Business Cycles and Asset Prices
with Andrés Schneider
Bigio, Saki and Andrés Schneider, “Liquidity Shocks, Business Cycles and Asset Prices” European Economic Review,Volume 97, August 2017, Pages 108-130
Abstract. In the aftermath of the Great Recession, macro models that feature financing constraints have attracted increasing attention. Among these, Kiyotaki and Moore (2012) is a prominent example. In this paper, we investigate whether the liquidity shocks and financial frictions proposed by Kiyotaki and Moore (2012) can improve the asset pricing predictions of the frictionless RBC model. We study the quantitative business cycle and asset pricing properties in an economy in which agents feature recursive preferences, are subject to a liquidity constraint, and suffer liquidity shocks. We find that the model predicts highly nonlinear time variation and levels of risk premia, which are driven by endogenous fluctuations in equity prices. However, the model fails to account for a basic fact: Periods of scarce liquidity are associated with high asset prices and low expected returns.
Endogenous Liquidity and the Business Cycle
Bigio, Saki, “Endogenous Liquidity and the Business Cycle” American Economic Review, Volume 105, Issue 6, June 2015, Pages 1883-1927.
Abstract. I study an economy where asymmetric information in the quality of capital endogenously determines the amount of liquidity available. Liquid funds are key to relax financial constraints on investment and employment. These funds are obtained by selling or using capital as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality which raise the cost of obtaining liquidity. The model can generate patterns for quantities and credit conditions similar to the Great Recession.
Optimal Self-employment Income Tax Enforcement
with Eduardo Zilberman
Bigio, Saki and Eduardo Zilberman, “Optimal Self-employment Income Tax Enforcement”Journal of Public Economics, Volume 95, Issues 9–10, October 2011, Pages 1021-1035.
Abstract. How should the IRS enforce income taxes? This paper outlines a model to optimally audit entrepreneurs. The number of workers hired by each entrepreneur is assumed to be observable. We show that, when the monitoring strategy depends only on labor input, it is optimal to audit firms in a way that generates some empirical regularities, like the missing middle. Moreover, the optimal monitoring strategy is consistent with actual IRS practices.
Learning Under Fear of Floating
Bigio, Saki, “Learning Under Fear of Floating” Journal of Economic Dynamics and Control, Volume 34, Issue 10, October 2010, Pages 1923-1950.
Abstract. I study a model that describes the policy of a Central Bank uncertain about whether currency depreciations cause output to expand (textbook model) or contract (balance-sheet model). When the private sector anticipates the Central Bank's policy and endogenously determines the model, Central Banks may fall in a learning trap. An increase in financial volatility provides an escape to such trap that replicates patterns in the data.
Published Comments
Comment: ``Business Cycle Asymmetry and Input-Output Structure: The Role of Firm-to-Firm Networks”
by Miranda-Pinto, Silva, and Young
Bigio, Saki (2023), commissioned by the Journal of Monetary Economics for the Carnegie-Rochester-NYU November 2023 Conference Issue
Comment: ``Optimal Supply of Public and Private Liquidity”
by Marina Azzimonti and Pierre Yared
Bigio, Saki (2019), commissioned by the Journal of Monetary Economics for the Carnegie-Rochester April 2018 Conference Issue
Comment: “Leverage Restrictions in a Business Cycle Model”
Bigio, Saki (2014), in Macroeconomic and Financial Stability: Challenges for Monetary Policy, Conference Volume, XVI Annual Conference of the Central Bank of Chile (Central Bank of Chile: Santiago, 2014).
Pre-PhD Papers
Non-linear effects of monetary policy and real exchange rate shocks in partially dollarized economies: an empirical study for Peru
by Saki Bigio and Jorge Salas
Bigio, Saki and Salas, Jorge (2006), in Money Affairs, Volume XIX, Number 1.
Corrupción e indicadores de desarrollo en el Perú y el mundo: una revisión empírica
by Saki Bigio and Nelson Ramirez
Bigio, Saki and Nelson Ramírez (2017), “Corrupción e indicadores de desarrollo en el Perú y el mundo: una revisión empírica”Crecimiento económico en el Perú: causas y consecuencias Céspedes, N., N. Loayza and N. Ramírez Rondán (eds.), Universidad de San Martín de Porres Press, forthcoming.