Dissertation Defense: Cristián Cuevas
Candidate: Cristián Cuevas
Major: Economics
Advisor: Dan Cao, Ph.D.
Title: Essays in Safe Assets and the Macroeconomy
Do local-currency sovereign bonds in emerging markets work as safe assets? In a sample of 9 EMEs, I estimate that local investors pay more than 30 basis points for the safety and liquidity of these bonds. I characterize the dynamics of this premium along both the local and the global financial cycle. The main difference with respect to advanced economies shows up in the latter: the convenience yield is procyclical with respect to the global financial cycle (drops during episodes of high global risk aversion). I analyze two exogenous shocks to EMEs (the Taper Tantrum and Covid-19) and find that this procyclicality is driven by the availability of alternative global safe assets like the U.S. Treasury. In an extension of the real-small open economy model where both a foreign and a local sovereign bond work as safe assets, I find that demand for safety and procyclical convenience yields significantly increase business cycle volatility. The model also provides policy implications: unconventional monetary policy in the form of local-currency asset purchases (used by many emerging economies during 2020) is less effective when facing a downturn, as investors prefer the dollar liquidity; accordingly, bond market segmentation between local and foreign bonds improves the effectiveness of unconventional monetary policies.