Publications and Forthcoming Papers

A Macroeconomic Model with Financially Constrained Producers and Intermediaries
Econometrica, Vol. 89, No. 3 (May, 2021), 1361–1418

Co-authors: Tim Landvoigt and Stijn Van Nieuwerburgh

How much capital should financial intermediaries hold? We propose a general equilibrium model with a financial sector that makes risky long-term loans to firms, funded by deposits from savers. Government guarantees create a role for bank capital regulation. The model captures the sharp and persistent drop in macro-economic aggregates and credit provision as well as the sharp change in credit spreads observed during the Great Recession. Policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non-financial sectors, and lower intermediary profits. They redistribute wealth from savers to the owners of banks and non-financial firms. Pre-crisis capital requirements are close to optimal. Counter-cyclical capital requirements increase welfare.

Phasing out the GSEs
Journal of Monetary Economics, Vol. 81 (August 2016), 111-132

Co-authors: Tim Landvoigt and Stijn Van Nieuwerburgh

We develop a new model of the mortgage market that emphasizes the role of the financial sector and the government. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. Both borrowers and intermediaries can default. The government provides both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations and higher financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Foreclosure crises beget fiscal uncertainty, further disrupting the optimal allocation of risk in the economy. Increasing the price of the mortgage guarantee "crowds in" the private sector, reduces financial fragility, leads to fewer but safer mortgages, lowers house prices, and raises mortgage and risk-free interest rates. Due to a more robust financial sector and less fiscal uncertainty, consumption smoothing improves and foreclosure rates fall. While borrowers are nearly indifferent to a world with or without mortgage guarantees, savers are substantially better off. While aggregate welfare increases, so does wealth inequality.

Fearing the Fed: How Wall Street Reads Main Street
Journal of Financial Economics, Volume 153, (March 2024), 103790

Co-authors: Tzuo Hann Law, Dongho Song, Amir Yaron

We provide strong evidence of persistent cyclical variation in the sensitivity of stock returns to macroeconomic news announcement (MNA) surprises. When the economy is significantly below trend (output gap is large and negative) and interest rates are not expected to go up, the stock return sensitivity to news is large. On the other hand, stock returns hardly react to news during periods when the economy is near trend (output gap is small) and interest rates are expected to rise. A monetary regime-switching model is shown to have implications consistent with this evidence. Taken together, the phase of the economy and interest rate expectations are key determinants of the cyclicality of the response of the stock market. 

Can the Covid Bailouts Save the Economy?
Economic Policy, Volume 37, Issue 110, April 2022, Pages 277–330

Co-authors: Tim Landvoigt and Stijn Van Nieuwerburgh

The covid-19 crisis has led to a sharp deterioration in firm and bank balance sheets. The government has responded with a massive intervention in corporate credit markets. We study equilibrium dynamics of macroeconomic quantities and prices, and how they are affected by government intervention in the corporate debt markets. We find that the interventions should be highly effective at preventing a much deeper crisis by reducing corporate bankruptcies by about half, and short-circuiting the doom loop between corporate and financial sector fragility. The fiscal costs are high and will lead to rising interest rates on government debt. We propose a more effective intervention with lower fiscal cost. Finally, we study longer-run consequences for firm leverage and intermediary health when pandemics become the new normal.

Staggered Health Policy Adoption: Spillover Effects and Their Implications
Accepted at Management Science

Co-authors: Luis Quintero, Alessandro Rebucci, and Emilia Simeonova

This paper investigates the direct and spillover effects on mobility caused by the staggered adoption of Stay-at-Home orders (SHOs) implemented by U.S. counties to contain it at the beginning of the COVID-19 pandemic. We find that mobility in neighboring counties declines by a third to a half as much as in the counties that implement the SHOs. Furthermore, these spillovers are concentrated in counties that share media markets with treated counties. Using directional mobility data, we also find that declines in internal mobility in the neighbor counties account for a much larger proportion of the overall decline in mobility than decreases in traffic originating in the treated counties. Together, these results provide strong evidence that SHOs operate through information sharing and voluntary social distancing. Based on our estimates and a simple model of staggered SHO adoption, we construct counterfactual scenarios that separate the impact of policy coordination from that of adoption timing. We find that staggered implementation of SHOs could yield mobility reductions that are larger than coordinated but delayed SHO adoption.

Working Papers

Asset Pricing with Optimal Under-Diversification

Co-authors: Tim Landvoigt

We study sources and implications of undiversified portfolios in a production-based asset pricing model with financial frictions. Households take concentrated positions in a single firm exposed to idiosyncratic shocks because managerial effort requires equity stakes, and because investors gain private benefits from concentrated holdings. Matching data on returns and portfolios, we find that the marginal investor optimally holds 45% of their portfolio in a single firm, incentivizing managerial effort that accounts for 4% of aggregate output. Investors derive control benefits equivalent to 3% points of excess return, rationalizing low observed returns on undiversified holdings in the data. A counterfactual world of full diversification would feature higher risk-free rates, lower risk premiums on fully diversified and concentrated assets, less capital accumulation, yet higher consumption and welfare. Exposure to undiversified firm risk can explain approximately 40% of the level and 20% of the volatility of the equity premium. A targeted subsidy that decreases diversification improves welfare by increasing managerial effort and reducing financial frictions. 

Can Monetary Policy Create Fiscal Capacity?

Co-authors: Tim Landvoigt, Patrick Shultz, and Stijn Van Nieuwerburgh

Governments around the world have gone on a massive fiscal expansion in response to the GFC and Covid crises, increasing government debt to levels not seen in 75 years. How will this debt be repaid? What role do conventional and unconventional monetary policy play? We investigate debt sustainability in a New Keynesian model with an intermediary sector, realistic fiscal and monetary policy, endogenous convenience yields, and substantial risk premia. During a large economic crisis, increased government spending and lower tax revenue lead to a large rise in government debt and raise the risk of future tax increases. Quantitative easing (QE) contributes to lowering the debt/GDP ratio and reducing the risk of future tax increases. QE is state- and duration-dependent: while a temporary QE policy deployed in a crisis stimulates aggregate demand, permanent QE crowds out investment and lowers long-run output.

Mortgage Credit, Aggregate Demand, and Unconventional Monetary Policy

I develop a quantitative model of the mortgage market operating in an economy with financial frictions and nominal rigidities. I use this model to study the effectiveness of large-scale asset purchases (LSAPs) by a central bank as a tool of monetary policy. When negative shocks hit, homeowner and financial sector balance sheets are impaired, borrowing constraints bind, asset prices and aggregate demand drop, hampering the transmission of conventional monetary policy. LSAPs boost aggregate demand in a crisis by directing additional lending to homeowners, raising house prices, and establishing expectations of future financial stability. However, subsequent policy normalization requires the financial sector to absorb heightened levels of borrower debt, depressing output and consumption in recovery. In the long run, a commitment to ongoing use of LSAPs in crises reduces credit and business cycle volatility and redistributes resources from borrowers and intermediaries to savers.

Works in Progress

Mortgage Structure and the Link Between Monetary Policy and Financial Stability

Co-authors: Lu Liu

Deposit Concentration and Financial Stability

Co-authors: Juliane Begenau and Tim Landvoigt

Quantitative Tightening

Co-authors: Miguel Faria-e-Castro and Dan Greenwald

Reconstruction Land Ownership

Co-authors: Luke Stein and Constantin Yannelis

Global Solutions to Macro-finance Models Using Transition Function Iteration

Co-author: Tim Landvoigt