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Report
Financial Crises and Lending of Last Resort in Open Economies
Lorenzoni, Guido; Bocola, Luigi (2017-10-24)
We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers? behavior can generate multiple ...
Staff Report , Paper 557

Working Paper
Searching for Yield Abroad : Risk-Taking Through Foreign Investment in U.S. Bonds
Ammer, John; Claessens, Stijn; Wroblewski, Caleb; Tabova, Alexandra M. (2018-03-28)
The risk-taking effects of low interest rates, now prevailing in many advanced countries, "search-for-yield," can be hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their portfolios toward riskier U.S. corporate bonds, consistent with "search-for-yield". We ...
International Finance Discussion Papers , Paper 1224

Working Paper
Idiosyncratic Investment Risk and Business Cycles
Goldberg, Jonathan (2014-01-10)
I show that, due to imperfect risk sharing, aggregate shocks to uncertainty about idiosyncratic return on investment generate economic contractions with elevated risk premia and a decrease in the risk-free rate. I present a tractable real business cycle model in which firms experience idiosyncratic shocks, to which managers are at least partially exposed; the distribution of these shocks is time-varying and stochastic. I show that the path for aggregate quantities, the price of physical capital, and the equity premium are the same as in a model without idiosyncratic risk, but with ...
Finance and Economics Discussion Series , Paper 2014-05

Report
Anxiety in the face of risk
Eisenbach, Thomas M.; Schmalz, Martin C. (2013)
We model an ?anxious? agent as one who is more risk averse with respect to imminent risks than with respect to distant risks. Based on a utility function that captures individual subjects? behavior in experiments, we provide a tractable theory relaxing the restriction of constant risk aversion across horizons and show that it generates rich implications. We first apply the model to insurance markets and explain the high premia for short-horizon insurance. Then, we show that costly delegated portfolio management, investment advice, and withdrawal fees emerge as endogenous features and ...
Staff Reports , Paper 610

Working Paper
Consumption in the Great Recession: The Financial Distress Channel
Athreya, Kartik B.; Sanchez, Juan M.; Mather, Ryan; Mustre-del-Rio, Jose (2019-08-29)
During the Great Recession, the collapse of consumption across the US varied greatly but systematically with house-price declines. Our message is that household financial health matters for understanding this relationship. Two facts are essential for our finding: (1) the decline in house prices led to an increase in household financial distress (FD) prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of FD prior to the recession was positively correlated with house-price declines at the onset of the recession. We measure the power of the ...
Working Paper , Paper 19-13

Newsletter
Privately Placed Debt on Life Insurers’ Balance Sheets: Part 1—A Primer
Meisenzahl, Ralf R.; Polacek, Andy; Fournier, Anne (2024-05)
Life insurers buy long-term assets to match their long-term liabilities and hence are among the largest investors in corporate bonds.1 Over the past decade, insurance companies have shifted their corporate bond investments toward privately placed bonds (private placements). A private placement is an unregistered security that is sold to a limited pool of investors, primarily institutional investors, such as investment banks, pension funds, and insurers. While privately placed bonds accounted for 13% of life insurers’ bond investments in 2004, they accounted for over 20% in 2022 (figure 1).
Chicago Fed Letter , Volume 493 , Pages 9

Working Paper
Financial Distress and Macroeconomic Risks
Athreya, Kartik B.; Sanchez, Juan M.; Mather, Ryan; Mustre-del-Rio, Jose (2021-10-22)
This paper investigates how, and how much, household financial distress (FD), arising from allowing debts to go unpaid, matters for the aggregate and cross-sectional consumption responses to macroeconomic risk. Through a battery of structural models, we show that FD can affect consumption responses through three channels: (1) as another margin of adjustment to shocks (direct channel); (2) because its persistence implies a significant degree of preference heterogeneity (indirect channel); and (3) because it can exacerbate macroeconomic risks whenever it is more severe in the hardest-hit ...
Working Papers , Paper 2019-025

Working Paper
Dissecting the Great Retirement Boom
Birinci, Serdar; Faria-e-Castro, Miguel; See, Kurt (2024-07)
Between 2020 and 2023, the fraction of retirees in the working-age population in the U.S. increased above its pre-pandemic trend. Several explanations have been proposed to rationalize this gap, such as the rise in net worth due to higher asset returns, the labor market's deterioration due to higher unemployment risk, the expansion of fiscal support programs, and increased mortality risk. We quantitatively study the interaction of these factors and decompose their relative contribution to the recent rise in retirements using an incomplete markets, overlapping generations model with a ...
Working Papers , Paper 2024-017

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