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.

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

Click here for the 2021 NBER Working Paper version that included an analysis of risk considerations.

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-o between pro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.

Bianchi, Javier and Saki Bigio “Banks, Liquidity Management and Monetary Policy“ Econometrica, Jan 2022, Volume 90, Issue 1, pages 391-454.

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 pro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.

Saki Bigio and Adrien D’Anvernas “Financial Risk Capacity” American Economic Journal: Macroeconomics, Vol. 13, no. 4., October 2021

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.

Saki Bigio and Jennifer La’O “Distortions in Production Networks” The Quarterly Journal of Economics, Volume 135, Issue 4, November 2020, Pages 2187–2253,

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.

Bigio, Saki (2010), “Learning Under Fear of Floating” Journal of Economic Dynamics and Control, Volume 34, Issue 10, October 2010, Pages 1923-1950.