The Mortgage Credit Channel of Macroeconomic Transmission (Job Market Paper)
This paper investigates if, how, and when mortgage credit growth propagates and amplifies shocks to the macroeconomy, and evaluates the implications of these dynamics for monetary and macroprudential policy. I develop a general equilibrium framework with endogenous prepayment decisions by borrowers and two credit constraints: a loan-to-value constraint, and a limit on the ratio of mortgage payments to income. This realistic structure delivers powerful transmission from interest rates, into mortgage credit growth, house prices and aggregate demand. The keys to transmission are a constraint switching effect through which changes in which constraint binds for borrowers cause large movements in house prices, and a frontloading effect through which waves of prepayment transmit movements in credit limits into the real economy. Monetary policy is more effective at stabilizing inflation due to this channel, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards alone, calibrated to loan-level data, can generate roughly half of the observed increase in price-rent (43%) and debt-to-household-income (53%) ratios, while relaxation of loan-to-value standards generates a much smaller boom. A cap on payment-to-income ratios, not loan-to-value ratios, is found to be the more effective macroprudential policy for limiting boom-bust cycles.
Origins of Stock Market Fluctuations (VoxEU Column)
with Martin Lettau and Sydney C. Ludvigson.
Abstract: Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.
Rare Shocks, Great Recessions (Appendix)
with Vasco Curdia and Marco Del Negro.
Journal of Applied Econometrics, Vol. 29(7), pp. 1031-1052, November/December 2014.
Winner: 2016 Richard Stone Prize, awarded to the best paper with substantive econometric application in the 2014 and 2015 volumes of the Journal of Applied Econometrics.
Abstract: We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student's t distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student's t specifcation is strongly favored by the data even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession period from the sample. We also show that inference about low-frequency changes in volatility -- and in particular, inference about the magnitude of Great Moderation -- is different once we allow for fat tails.
WORK IN PROGRESS
Labor-Capital Inequality and the Stock Market
with Sydney C. Ludvigson
Large BVARs with Stochastic Volatility
with Marco Del Negro and Domenico Giannone
Liquidity and Macroeconomic Fluctuations: An Empirical Investigation
with Marco Del Negro
Sources of Heterogeneity in Retail Price-Setting Behavior
with Bulat Gafarov, John Mondragon, and Leonid Ogrel
The Consumption Response to Seasonal Income: How Much Can Be Explained By Liquidity Constraints?
with Greg Kaplan and Gianluca Violante