“Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings”, with Lorenzo Pandolfi, 2018, forthcoming, at the Journal of Financial Economics.

In this paper we analyze how government bond prices and liquidity are affected by capital flows to the sovereign debt market. Additionally, we explore whether these flows spill over to the exchange rate market. To tackle endogeneity concerns, we construct a measure of informationfree capital flows implied by mechanical rebalancings (FIR) from the largest local-currency government-debt index for emerging countries. We find that FIR is positively associated with the returns on government bonds and with the depth of the sovereign debt market in the aftermath of the rebalancings. These capital flows also impact on the exchange rate market: larger inflows (outflows) are associated to larger currency appreciations (depreciations).


“Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market”, 2018, forthcoming at the Review of Financial Studies.

This paper uses a natural experiment to show that government access to foreign credit increases private access to credit. I identify a sudden, unanticipated, and arguably exogenous increase in capital inflows to the sovereign debt market in Colombia. This was due to J.P. Morgan’s inclusion of Colombian bonds into its emerging markets local currency government debt index, which led to an increase in the share of sovereign debt held by foreigners from 8.5 to 19 percent. This event had significant and heterogeneous effects on Colombia’s commercial banks: banks that acted as market makers in the treasury market reduced their sovereign debt holdings by 7.8 percentage points of assets and increased their commercial credit availability by 4.2 percentage points of assets compared to the rest of the banks. The differential increase in credit was around 2 percent of GDP. Industry level evidence suggests that this had positive effects on the real economy. A higher exposure to market makers led to a higher growth in employment, production, sales and GDP.


“International Asset Allocations and Capital Flows: The Benchmark Effect”, with Claudio Raddatz and Sergio Schmukler, 2017, Journal of International Economics, vol. 108, pp.413-430.

Featured in All About Finance, The Financial Times, The Institute for International Economic Policy Blog, Voxeu, WB Research Highlights, WB Research Newsletter.

Benchmark indexes have become important in financial markets for portfolio investment. In this paper, we study how international equity and bond market indexes impact asset allocations, capital flows, asset prices, and exchange rates across countries. We use unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996–2014. We find that movements in benchmarks appear to have important effects on equity and bond mutual fund portfolio allocations, including passive and active funds. The effects persist after controlling for time-varying industry-level factors, country-specific effects, and macroeconomic fundamentals. Changes in benchmarks not only impact asset allocations, but also capital flows, abnormal returns in aggregate stock and bond prices, and exchange rates. These systemic effects occur not just when benchmark changes are announced, but also later, when they become effective. By impacting country allocations, benchmarks explain apparently counterintuitive movements in capital flows and asset prices, as well as contagion effects.


“Financial Globalization in Emerging Economies: Much Ado About Nothing?”, with Eduardo Levy Yeyati, 2014, Economia, vol. 14 (20), pp. 91-131.

Featured in Voxeu.

Financial globalization (FG), understood as the deepening of cross-border capital flows and asset holdings, has become increasingly relevant for the developing world for a number of reasons, including the consequences of its changing composition on countries’ balance sheets, its role in the transmission of global financial shocks, its benefits in terms of financial development, international risk, and business cycle smoothing, and the implication of all of the above for macroeconomic and prudential policies. In this paper, we focus on these issues from an empirical perspective, building on, updating, and refocusing the existing literature to characterize the evolution and implications of financial globalization in emerging economies.


“Emerging Economies in the 2000s: Real Decoupling and Financial Recoupling”, with Eduardo Levy Yeyati, 2012, Journal of International Money and Finance, vol. 31 (8), pp. 2102-2126.

Featured in Voxeu.

The paper documents an intriguing development in the emerging world in the 2000s: a decoupling from the business cycle of advanced countries, combined with the strengthening of the co-movements in the main emerging market assets that predates the synchronized selloff during the crisis. In addition, the paper tests the hypothesis that financial globalization, to the extent that it creates a common, global investor base for EM, could lead to a tighter asset correlation despite the weaker economic ties. While an examination of the impact of alternative financial globalization proxies yield no conclusive result, a closer look at global emerging market equity and bond funds show that the latter indeed foster financial recoupling during downturns, reflecting the fact that they trade near their respective benchmarks and respond to withdrawals by liquidating holdings across the board.

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