Lennart Niermann - RESEARCH

Working Papers

Decomposing the Investment Channel of Monetary Policy with M. Momm (link)

Monetary policy announcements simultaneously change borrowing costs and firms' expectations about future economic conditions. Conventional estimates of the investment response to monetary policy, therefore, conflate price effects with belief revisions and fail to identify the structural sensitivity of investment to financing conditions. We exploit quasi-experimental variation from the ECB's 2016 Corporate Sector Purchase Programme (CSPP), which created persistent cross-sectional differences in firms' financing costs through bond market segmentation, to isolate the causal effect of borrowing costs on firm investment. We find that investment elasticities estimated from aggregate monetary policy shocks understate the effect of a pure cost-of-debt shock by 33 percent over four quarters. Our results imply that the structural sensitivity of investment to borrowing costs is larger than previously thought, with direct implications for the calibration of quantitative macroeconomic models. The gap reflects a sizable firm-level information effect. A model of lumpy firm investment with an information effect rationalizes this attenuation: information effects are quantitatively important when a sufficient mass of firms lies near their investment threshold.

Presentations: EDGE Conference 2025, European University Institute

Courts, Costs, and Crises: The Role of Penalties for Sovereign Default Expectations (link)

Runner-up of the Cambridge Finance Best Student Paper award 2024

This paper studies the causal effect of default costs on sovereign default probabilities. I exploit high-frequency changes in litigation-induced default costs around legal news-shocks from creditor lawsuits. A one ppt increase in the default-penalty-to-GDP ratio leads to a 1.38 ppt drop in default probability, indicating that direct economic costs are a central reason creditors expect repayment. I develop these results in a model of international borrowing with endogenous default and heterogeneous bond contracts. Here, similarly, adopting more punitive debt portfolios reduces default probabilities and risk premiums. However, the same mechanism can also lead shortsighted governments to pursue high-debt-high-default-cost regimes, heightening financial instability.

Presentations: CEPR Paris Symposium 2024, 96th International Atlantic Economic Conference, Philadelphia, PA, USA. European University Institute.

Benchmarking Sustainable Debt Trajectories in Low-Income Countries with A. Abbas and P. Iossifov [Draft available soon]

Abstract. In this paper, we develop two complementary approaches for benchmarking the public debt trajectories of Low-Income Countries (LICs) to assess their dynamic stability. We compare the evolution of the overall public debt-to-GDP ratios of reference LICs with the historical experiences of other countries with similar characteristics, which are now further down the path of economic development and have not experienced public debt stress events. We rely on both direct comparison and a novel application of the synthetic control method (SCM). These public debt trajectories that are dynamically stable from a historical perspective can provide insights into the debt sustainability analysis for LICs.

Presentations: IMF Sovereign Debt Workshop.

Work in Progress

Debt Management with Callable Bonds: A Historical and Theoretical Perspective with M. Ellison, E. Faraglia and F. Velde

Pre-PhD Work

The COVID-19 crisis: what explains cross-country differences in the pandemic’s short-term economic impact with I. Pitterle, UN Working Paper Series (2021) (link)

Abstract. The COVID-19 pandemic has caused the most universal health and socio-economic crisis in recent history. However, the magnitude of the economic damage has differed widely; some countries were hit particularly hard, while others have managed to weather the storm much better. In this paper, we use cross-country regression analysis to identify factors that help explain the differences in the growth impact of the COVID-19 shock. Our findings underscore the critical role of balancing health and economic concerns in managing the pandemic as both a country’s exposure to the coronavirus and the stringency of containment measures are strongly correlated with its growth performance. In addition, our results shed light on several aspects of economic resilience. Good governance, provision of fiscal support and strong macroeconomic fundamentals all helped cushion the economic impact. By contrast, a lack of economic diversification – reflected in overreliance on the tourism sector or oil production – has significantly amplified the shock.

UN DESA Policy Paper