Žymantas Budrys

Research

Working Papers

Consumer of Last Resort: Government procurement, firm-level evidence and the macroeconomy (Latest Draft)

Public spending has been shown to stimulate private consumption and aggregate output. Less is known about the extent to which public demand and procurement markets can affect individual firms, particularly their financial stability and resilience to shocks, and can re-balance risks across businesses in the economy. In this paper, I focus on these issues and investigate them both empirically and theoretically. To do so, I first build a novel database with firm-level data on US government procurement programs and establish the unpredictability of competitive contracts through an event study. I then explore the effects of procurement contracts on firms’ balance sheets and find a significant positive impact on winning firms’ sales, profits and investments. I contribute to the literature by showing that public procurement can dampen perceived uncertainty and volatility associated with the firm in times of stringent financial conditions. I generalise and confirm my empirical findings in a general equilibrium model with two types of firms, contractors and outsiders. Using the theoretical model, I provide a deeper understanding of the design of procurement markets and their interplay with public policies to balance uncertainty and risks across firms.

The term structure of judgement: interpreting survey disagreement with Federica Brenna (Latest draft)

Consensus forecasts by professionals are highly accurate yet hide large heterogeneity. We build a framework to extract the judgement component from survey forecasts and analyse to what extent it contributes to respondents’ disagreement. We find for the average respondent a sizable contribution of judgement about the current quarter, which often steers unconditional forecasts towards the realisation, improving accuracy. We identify the structural components of judgement exploiting stochastic volatility and give an economic interpretation to expected future shocks. For individual respondents, about one-third of disagreement is due to differences in coefficients or models used, and the remaining is coming from different assessments about future shocks; the latter mostly concerns the size of shocks, while there is a general agreement on their source.

Striking a bargain: narrative identification of wage bargaining shocks with Mario Porqueddu and Andrej Sokol (Latest draft, ECB Working Paper, VoxEU, ECB Research Bulletin, Bank of Lithuania Working Paper Series)

We quantify wage bargaining shocks’ effects on macroeconomic aggregates in Germany using a structural vector auto-regression model. We identify exogenous variation in bargaining power from episodes of minimum wage introduction and industrial disputes. This disciplines the impulse responses of unemployment and output, and sharpens inference on the behaviour of other variables, which is consistent with theoretical predictions from search and matching models. We find that wage bargaining shocks are an important contributor to aggregate fluctuations in unemployment and inflation, exhibit close to full pass-through to consumer prices, and imply plausible dynamics for the vacancy rate, firms’ profits, and the labor share.

Impact of higher capital buffers on banks’ lending and risk-taking: evidence from the euro area experiments with Giuseppe Cappelletti, Aurea Ponte Marques, Paolo Varraso and Jonas Peeters (ECB Working Paper, SSRN)

We study the impact of higher bank capital buffers, namely of the Other Systemically Important Institutions (O-SII) buffer, on banks’ lending and risk-taking behaviour. The O-SII buffer is a macroprudential policy aiming to increase banks’ resilience. However, higher capital requirements associated with the policy may likely constrain lending. While this may be a desired effect of the policy, it could, at least in the short-term, pose costs for economic activity. Moreover, by changing the relative attractiveness of different asset classes, a higher capital requirement could also lead to risk-shifting and therefore promote the build-up (or deleverage) of banks’ risk-taking. Since the end of 2015, national authorities, under the EBA framework, started to identify banks as O-SII and impose additional capital buffers. The identification of the O-SII is mainly based on a cutoff rule, ie. banks whose score is above a certain threshold are automatically designated as systemically important. This feature allows studying the effects of higher capital requirements by comparing banks whose score was close to the threshold. Relying on confidential granular supervisory data, between 2014 and 2017, we find that banks identified as O-SII reduced, in the short-term, their credit supply to households and financial sectors and shifted their lending to less risky counterparts within the non-financial corporations. In the medium-term, the impact on credit supply is defused and banks shift their lending to less risky counterparts within the financial and household sectors. Our findings suggest that the discontinuous policy change had limited effects on the overall supply of credit although we find evidence of a reduction in the credit supply at the inception of the macroprudential policy. This result supports the hypothesis that the implementation of the O-SII’s framework could have a positive disciplining effect by reducing banks’ risk-taking while having only a reduced adverse impact on the real economy through a temporary decrease in credit supply.

---

Work in Progress

Are large-language models useful for narrative identification? with Jan David Schneider

Exploiting narrative information presents a promising avenue for shock identification, though with some challenges: analysing historical records can be labour-intensive and subject to misinterpretation. We want to understand whether large-language models (LLMs) can facilitate the process of collecting and evaluating narrative information. As a result, this process could further help to exploit documentation, which has been unexplored, for new applications of narrative shock identification.

Reevaluation of Time-Varying parameters model: Monte-Carlo study with Fabio Canova

Household Deleveraging and Unemployment (draft available upon request)

I analyse the dynamics of household deleveraging following the tightening of credit conditions and collapse in house prices that took place during the financial crisis and its role in the consequent prolonged high levels of unemployment. To do so, I propose a structural model, combining both search-matching and financial frictions in the form of a liquidity constraint. In the economy, households can only borrow against their excess collateral if they are employed. In a scenario of tighter credit conditions, due to decreasing housing prices, agents face a lower incentive of smoothing consumption using mortgage markets; thus, they rather bid for a higher wage to compensate for the loss in consumption. The model produces an amplification effect on unemployment, with a size directly dependent on agents’ deleveraging behaviour. The friction also creates a less elastic response of wages, which leads to a slower adjustment of unemployment.