The Mortgage Credit Channel of Macroeconomic Transmission (Submitted, SSRN Version)
Abstract: I investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income. This realistic environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy can more easily stabilize inflation due to this amplification, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears essential to the recent boom. A cap on payment-to-income ratios, not loan-to-value ratios, is 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