1/
Why economists like models (with an homage to Jorge Luis Borges)
After I posted a paper on the catalytic effect of blended finance, I got some pushback on the idea that a unified analytical framework is useful at all. 🧵
9/ A formal model is not a one-size-fits-all prescription. It is a map.
And you need a map most when the terrain is complicated — but a 1:1 map is useless.
Here is the great Jorge Luis Borges reading his own
Del Rigor de la Ciencia www.youtube.com/watch?v=zwDA...
8/ Same logic for blended finance. My paper starts from a clean benchmark — a world where blended instruments add no value — then asks: under what market failures can they outperform it, and by how much?
7/ By specifying the exact conditions under which financing form is irrelevant, MM tells you where to look for the conditions under which it is relevant.
It is a diagnostic framework: which market failure are we dealing with? Which assumption is violated?
6/ We all know MM's assumptions do not hold. Markets are incomplete. Taxes distort. Adverse selection and moral hazard are everywhere. So the form of financing clearly does matter.
Does that make MM useless? Exactly the contrary.
5/ Consider Modigliani-Miller, probably the most important result in all of corporate finance.
MM: under perfect capital markets, no distortionary taxes, no incentive problems — the form of financing does not matter for firm value. en.wikipedia.org/wiki/Modigli...
4/ When a model's predictions do not match what you observe on the ground, the mismatch is informative. It tells you which assumption is failing and which feature of the local context you need to incorporate.
The model does not ignore context. It helps you locate it.
3/ Without a framework, it is hard to know which differences matter and why.
Formal models force you to state your assumptions explicitly. No hiding behind vague qualifications. No hand-waving. Every assumption is visible, every logical step is checkable
2/ The criticism is that every case is different. Context matters. Sector, geography, regulation, culture — all of it.
This is right. And that is exactly why models are useful
The blended finance paper is here ideas.repec.org/p/gii/giihei...
1/
Why economists like models (with an homage to Jorge Luis Borges)
After I posted a paper on the catalytic effect of blended finance, I got some pushback on the idea that a unified analytical framework is useful at all. 🧵
8/ Blended finance can help but does not always work. When default risk is high, multipliers are often below one. Smart instrument choice matters.
7/ A practical rule of thumb: production externalities → subsidized loans. Financial frictions → guarantees. And unless credit rationing is the dominant friction AND default risk is high, avoid full de-risking.
6/ Result 3: Full de-risking is rarely optimal. For subsidized loans, a non-de-risking intervention always achieves a higher multiplier. For guarantees, full de-risking is only warranted under credit rationing and high default risk.
5/ Result 2: Guarantees and subsidized loans yield equal multipliers for pure de-risking and production externalities. But guarantees outperform subsidized loans when the market failure is a financial friction. Instrument choice is not neutral.
4/ Result 1: The multiplier is DECREASING in the severity of production externalities. Interventions that are most needed achieve the lowest leverage. Large reported multipliers may simply reflect interventions in nearly efficient markets, not targeting of serious distortions
3/ I focus on the catalytic multiplier: the increase in total project size per dollar of expected fiscal cost. I compare two instruments — subsidized loans and credit guarantees — under two canonical market failures: production externalities and credit market imperfections.
2/ Development finance institutions now mobilize over $250 billion annually through blended finance. Yet practitioners still lack a unified framework to evaluate its catalytic effect and choose among instruments. That is the gap I try to fill. Paper's here
ideas.repec.org/p/gii/giihei...
1/ Bank/Fund Spring Meetings are underway. Blended finance — using concessional public funds to crowd in private capital for the SDGs — is front and centre. But do we really know which instruments work best, and when? A new paper of mine tries to answer this. 🧵
This figure plots the evolution of total government bond issuance (in billion US dollars) over the period 2000-2023. The orange bars show Chinese central government bond issuance and the blue bars show central government bond issuance by the other 19 countries in our dataset. Emerging market debt has surged since the pandemic, renewing concerns about rollover risk and fiscal vulnerability. This column uses a new auction-level dataset covering sovereign bond issuance events across 20 emerging markets to study the evolution, currency composition, and maturity of emerging market bond issuance. The majority of issuance is in local currency and has a maturity of five years or less. Furthermore, local-currency borrowing is mainly driven by rollover needs, while foreign-currency issuance is timed around global financial conditions. These findings underscore the importance of developing deep domestic bond markets as core infrastructure for macroeconomic resilience.
Ka Lok Wong, @markya.bsky.social & @upanizza.bsky.social study sovereign bond issuance events across 20 EMDEs. The majority of issuance is in local currency and has a maturity of 5 years or less. Deep domestic bond markets are key for macroeconomic resilience.
cepr.org/voxeu/column...
#EconSky
Over the past few weeks I have been talking with
@emilypeck.bsky.social @axios.com about the US Treasury market.
I love her Rom-com title.
As @laynamosley.bsky.social says the perfect rom-com for debt nerds
www.axios.com/2026/03/26/t...
This is couple of blocks from my mother-in-law’s apartment. It is the first time thy hit so close to her
Updates from Beirut
Just spoke with my sister-in-law. They stay in the corridor, away from windows.
It's cold but windows are kept open day and night so bomb vibrations don't shatter the glass.
And they are among the lucky ones.
We live in a horrible world.
1/7🧵 New paper "Too Much Finance Redux" with Jean-Louis Arcand and Enrico Berkes — a follow-up to over a decade of work on whether financial deepening can go too far. Here's the story: @gvagrad.bsky.social
7/7 The question of whether finance can become "too much of a good thing" for economic growth remains as relevant as ever — particularly at a moment when calls for further financial deregulation are once again growing louder. ideas.repec.org/p/gii/giihei...
6/7 One important challenge to our findings: "The Economic Effects of 'Excessive' Financial Deepening" (2025) by Markus Eberhardt and coauthors, using a factor-augmented heterogeneous diff-in-diff estimator. We're very much looking forward to continuing the dialogue! 📊
5/7 A big thank you to David Cobham and @alexcobham.bsky.social for organizing the conference and for inviting us to write this paper.
4/7 Stephen Cecchetti & Enisse Kharroubi also presented at the conference — using different data and different methods — and their findings similarly corroborate the too-much-finance hypothesis.
3/7 In January 2026, we presented "Too Much Finance Redux" at a conference at LSE. It shows that our original findings are robust across all possible estimation periods between 1960 and 2019, using transparent and simple estimation techniques. The results hold.
2/7 In 2012, Jean-Louis, Enrico Berkes & I published an IMF WP titled "Too Much Finance" (published in the Journal of Economic Growth in 2015). Together with a paper by Stephen Cecchetti & Enisse Kharroubi, it sparked a large literature. ideas.repec.org/p/gii/giihei...
1/7🧵 New paper "Too Much Finance Redux" with Jean-Louis Arcand and Enrico Berkes — a follow-up to over a decade of work on whether financial deepening can go too far. Here's the story: @gvagrad.bsky.social