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Luis de Guindos
Vice-President of the European Central Bank
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Matteo Maggiori’s contribution to research on international finance and macroeconomics

Speech by Luis de Guindos, Vice-President of the ECB, at the ceremony to award the 21st Germán Bernácer Prize for Promoting Economic Research in Europe to Matteo Maggiori

Madrid, 20 June 2023

We are meeting today to award the Germán Bernácer Prize for outstanding contributions in the fields of macroeconomics and finance to a young European economist, Matteo Maggiori.[1] This 21st edition of the prize[2] honours Matteo “for his influential research on international finance and macroeconomics, including asset pricing and exchange rate dynamics”. I am delighted to be here today to celebrate his achievements with you.

Matteo’s research sheds light on many important aspects of international macroeconomics and finance under a common overarching theme: the role of imperfect financial markets.[3] A non-exhaustive list of his research includes: the international financial system; reserve currencies; tax havens; global capital flows and portfolio investment; exchange rate dynamics; expectations and bubbles. His research effectively combines theory with data, and it often provides key insights for economic – and monetary – policy.

In the decade since he graduated from the Haas School of Business at the University of California, Berkeley, Matteo has already made a profound mark on the profession and earned wide recognition, reflected in numerous prizes and awards.[4] His work is widely cited and published in the top academic journals. Since 2019 Matteo has been teaching as a Professor of Finance at the Stanford Graduate School of Business.

Today I would like to highlight some of Matteo’s key contributions. But let me start with one caveat: Matteo is very productive. Far too productive for me to do justice to all his work in my brief remarks today. So I will inevitably have to skip over much of his work, such as his recent award-winning paper on heterogeneous investor beliefs[5] and his new research on the link between exchange rates and stock market returns.[6]

Not everyone in the room may know that – not so long ago – Matteo was a trader of foreign exchange and interest rates (at JP Morgan). This experience enabled him to see first-hand how financial markets work. And it has been a source of inspiration for Matteo’s choice of research topics, which are always of practical relevance. Matteo’s background seems to underpin his approach to research, which often treats traditional theoretical assumptions in international macroeconomics with a healthy dose of scepticism.

In one of his first papers,[7] for example, he observes that exchange rates rarely absorb shocks in the way economic theory typically assumes. This paper, co-authored with Xavier Gabaix, nicely illustrates Matteo’s focus on international macroeconomics with imperfect financial markets. It stresses the financial determinants of exchange rates, namely financiers’ limited risk-bearing capacity and its role in explaining a number of puzzles and phenomena in international finance.

Another notable area of Matteo’s work is his research on the functioning of the international financial system and the role of reserve currencies, in particular the US dollar.[8] Together with Emmanuel Farhi,[9] he shows how many well-known theories and conjectures – such as those of Keynes,[10] Nurkse[11] and Triffin[12] – can be combined in a single, easy-to-use framework. Their work shows that a shift from a single reserve currency issuer to a large number of them would have a positive impact on welfare, but also that the effect of an intermediate shift – a shift to a small number of issuers – depends on multiple factors and might in some cases be destabilising.

Matteo is also exceptionally creative in using microdata to pin down the workings of the international monetary and financial system. In a paper on capital allocation[13] he exposes a home currency bias in global bond holdings: lenders prefer bonds denominated in their home currency, but care little about where the borrower resides. On the borrowing side, all but the very large firms issue bonds only in their home currency. Because of the investors’ home currency bias, firms borrow very little from abroad. The big exception to this pattern is the United States. Almost all investors appear willing to lend in US dollars, meaning that even small US firms borrow not only from domestic but also from foreign sources. Small firms thus benefit particularly if their home currency is an international currency, because it gives them easy access to the global capital market. This paper is therefore also relevant for the policy debate about the international role of the euro. This diligent data work shows that the international role of currencies is very much in flux – a finding that obviously makes one wonder what is driving this. Matteo and his co-authors describe how countries compete in establishing a reserve currency and how important it is to gradually build reputation.[14]

US financial markets get attention in any study of global capital flows. There is a good reason for this – the special role they play. But there is another reason, which is not a particularly good one, namely data availability. Over the years, the network of cross-country financial links has become increasingly complex. International funding is often channelled through intermediaries in tax haven countries, which blurs the link between borrowing and lending economies in the official statistics and with it the measurement of the international transmission of shocks. The Global Capital Allocation Project[15] which Matteo co-founded explores these links at a global scale: by following corporate ownership chains to derive consolidated portfolio holdings, it uncovered that the bilateral portfolio investment of developed economies in large emerging economies is much larger than commonly thought. For example, the euro area’s exposure to Chinese equity and debt, for example, turns out to be respectively three and five times larger than previously estimated. It also suggests that some of what has been considered foreign direct investment is portfolio investment in disguise, which is known to be more volatile. Moreover, Matteo and his co-authors show that the foreign currency exposure of emerging economies’ external liabilities is considerably larger, which has important implications for risk assessment and thus for economic and monetary policy. Despite the great data challenges, Matteo and his co-authors – in a cooperation between the Global Capital Allocation Project and the ECB – also took on the task of disentangling the investment positions of offshore-like financial centres within the euro area. They show, for example, that the euro area is less financially integrated than official data suggest.[16] This project is not only promising because it may change our priors on financial exposures within and outside the euro area, but also because it demonstrates how central banks and academics can join forces to shed light on complex financial intermediations chains within Europe and globally.

Before I give you the impression that Matteo is a pure international macroeconomist, let me highlight another – quite different – area of his work: the economics of very long-run discounting. Investment decisions in the fight against climate change hinge crucially on discounting cash flows far out in the future. Due to compounding, small differences in the discount rate can determine whether a project will be implemented or not. But we have very little guidance on what the proper discount rate might be. To help us select the appropriate one, Matteo and his co-authors examine information on very long-term leases – of 100 or more years’ maturity – in the United Kingdom and Singapore and compare the price of such leases with the price of buying similar properties, i.e. with the price of owning without a time limit. They show that people care quite a lot about cash flows in the distant future: the implied very long-run discount rate is only 2.6% per year.[17] Discount rates for such long horizons are highly relevant for weighing up the costs and benefits of projects spanning more than one generation, such as those related to climate and the environment.[18]

Given the evidence of climate change, I do not have to stress the importance of this research. Matteo and his co-authors make the important point that investments mitigating global warming and its effects should be priced like an insurance.[19] An insurance is most valuable in the bad states of the world, and thus the appropriate discount rate must be below the risk-free rate at all horizons. But if the appropriate discount rate for a climate change hedge is less than 2.6% for long-term projects, and even less for short-term ones,[20] then far more public and private projects should be implemented than suggested by other studies.

The long-run discount rate issue has direct implications for the overall strategy to fight global warming, which goes far beyond economics. So, my opening remarks about Matteo’s work providing “key insights for economic and monetary policy” do not fully do it justice. Matteo’s latest working paper,[21] released just a few days ago, studies the interface between geopolitics and economics. It describes how dominance in key industries, such as finance or information technology, enables a hegemon country to extract rents from small open economies. The framework adds a strategic aspect to the economic underpinnings of geopolitical power.

Let me conclude. In this brief tour through Matteo’s research, I hope I have conveyed just how much he has expanded our knowledge in an impressive range of areas. His topical and seminal work is international macroeconomics at its best: innovative, data-driven, and providing lessons for policymakers. Matteo, we all look forward to your research and new insights in the coming years!

I am delighted to congratulate you, Matteo, on winning the 2022 Germán Bernácer Prize for Promoting Economic Research in Europe.

  1. I would like to thank Georg Strasser from the ECB’s Directorate General Research for his contribution to this speech.

  2. The Germán Bernácer Prize has been awarded every year since 2001.

  3. Matteo also authored a chapter on this topic in the Handbook of International Economics. See Maggiori, M. (2022), “International Macroeconomics with Imperfect Financial Markets”, in Gopinath, G., Helpman, E. and Rogoff, K. (eds.), Handbook of International Economics, Vol. 6, Elsevier, pp. 199-236.

  4. This includes the 2021 Fischer Black Prize for an outstanding financial economist under the age of 40 and the Carlo Alberto Medal for an outstanding Italian economist under the age of 40.

  5. Giglio, S., Maggiori, M., Stroebel, J. and Utkus, S. (2021), “Five Facts about Beliefs and Portfolios”, American Economic Review, Vol. 111, No 5, pp. 1481-1522.

  6. Lilley, A., Maggiori, M., Neiman, B. and Schreger, J. (2022), “Exchange Rate Reconnect”, The Review of Economics and Statistics, Vol. 104, No 4, pp. 845-855.

  7. Gabaix, X. and Maggiori, M. (2015), “International Liquidity and Exchange Rate Dynamics”, The Quarterly Journal of Economics, Vol. 130, No 3, pp. 1369-1420. According to Google, this is Matteo’s most cited paper (among his many frequently cited papers).

  8. In his award-winning job market paper, Matteo already provides a model that explains the US external balance with the fact that the financial sector in the USA is more advanced than in other countries. See Maggiori, M. (2017), “Financial Intermediation, International Risk Sharing, and Reserve Currencies”, American Economic Review, Vol. 107, No 10, pp. 3038-3071.

  9. Farhi, E. and Maggiori, M. (2018), “A Model of the International Monetary System”, The Quarterly Journal of Economics, Vol. 133, No 1, pp. 295-355.

  10. Keynes, J.M. (1923), A Tract on Monetary Reform, Macmillan.

  11. Nurkse, R. (1944), International Currency Experience: Lessons of the Interwar Period, League of Nations.

  12. Triffin, R. (1960), Gold and the Dollar Crisis: The Future of Convertibility, Yale University Press. The Triffin dilemma was coined in the context of the Bretton Woods system but highlights the instability of reserve currencies in general. The issuer of a reserve currency must be willing to accommodate global demand. If demand increases, it might be issuing reserve assets in such amounts that it becomes subject to confidence crises and ultimately runs.

  13. Maggiori, M., Neiman, B. and Schreger, J. (2020), “International Currencies and Capital Allocation”, Journal of Political Economy, Vol. 128, No 6, pp. 2019-2066.

  14. Clayton, C., Dos Santos, A., Maggiori, M. and Schreger, J. (2023), “Internationalizing Like China”, NBER Working Paper Series, No 30336, January. Matteo presented an earlier version of this working paper at a recent Invited Speaker Seminar at the ECB.

  15. Coppola, A., Maggiori, M., Neiman, B. and Schreger, J. (2021), “Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens”, The Quarterly Journal of Economics, Vol. 136, No 3, pp. 1499-1556.

  16. Beck, R., Coppola, A., Lewis, A., Maggiori, M., Schmitz, M. and Schreger, J. (2023), “The Geography of Capital Allocation in the Euro Area”, Working Paper, May.

  17. Giglio, S., Maggiori, M. and Stroebel, J. (2015), “Very Long-Run Discount Rates”, The Quarterly Journal of Economics, Vol. 130, No 1, pp. 1-53.

  18. Based on this data, Matteo also rejects a classic rational bubble in the United Kingdom and Singapore housing markets; see Giglio, S., Maggiori, M. and Stroebel, J. (2016), “No-Bubble Condition: Model-free Tests in Housing Markets”, Econometrica, Vol. 84, No 3, pp. 1047-1091.

  19. Giglio, S., Maggiori, M., Rao, K., Stroebel, J. and Weber, A. (2021), “Climate Change and Long-Run Discount Rates: Evidence from Real Estate”, The Review of Financial Studies, Vol. 34, No 8, pp. 3527-3571.

  20. Risk and insurance value are highest over short horizons because in such cases the economy has little time to recover.

  21. Clayton, C., Maggiori, M. and Schreger, J. (2023), “A Framework for Geopolitics and Economics”, Yale School of Management, mimeo, June.


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