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Working Paper
Beliefs, Aggregate Risk, and the U.S. Housing Boom
Endogenously optimistic beliefs about future house prices can account for the path and standard deviation of house prices in the U.S. housing boom of the 2000s. In a general equilibrium model with incomplete markets and aggregate risk, agents form beliefs about future house prices in response to shocks to fundamentals. In an income expansion with looser credit conditions, agents are more likely to underpredict house prices and revise up their beliefs. Matching the standard deviation and steady rise in house prices results in homeownership becoming less affordable later in the boom as well as ...
Journal Article
New Rules for Credit Default Swap Trading: Can We Now Follow the Risk?
Credit default swaps, a useful but complex financial innovation of the 1990s, were traded over the counter before the financial crisis. Because of this infrastructure, a very opaque market emerged?and from it, the severe risk imbalances that helped fuel the crisis. Reforms are now being worked out and put in place which will move the majority of credit default swaps transactions to more transparent exchanges. Market participants will be able to see pre-trade and posttrade pricing, and regulators will have access to information that will allow them to monitor risk concentrations as they ...
Working Paper
The Fed's Fine-Tune: Coarse Statements and Predictive Pressers
Central bank communications, particularly FOMC statements and press conferences, play a crucial role in shaping financial market expectations. Using large language models to quantify central bank content, this paper demonstrates how sentiment aligns with traditional market-based monetary policy measures. We show that press conferences correlate with future policy to a greater extent than other communications. While FOMC statements coarsely signal the current stance of policy, press conferences fine-tune the message, which helps market participants revise their expectations about future policy.
Working Paper
Debt Flexibility
How flexible are corporate loans after origination? Theory predicts coordination problems should make syndicated loans harder to modify than single-bank loans. We show the opposite. Using comprehensive regulatory data, we document that syndicated loans are modified frequently and respond to borrower distress, while single-lender loans are half as likely to be modified. This gap is not explained by covenants or performance pricing. Instead, syndicated loans are monitored more intensively. We show theoretically and empirically how fixed monitoring costs generate scale economies: larger loans ...
Journal Article
Labor's declining share of income and rising inequality
Labor income has been declining as a share of total income earned in the United States for the past three decades. We look at the past effect of the labor share decline on income inequality, and we study the likely future path of the labor share and its implications for inequality.
Working Paper
The Federal Reserve System and World War I: Designing Policies without Precedent
The Federal Reserve System failed to prevent the collapse of intermediation during the Great Depression (1929-1933) and took action as if it was unaware of policies that should have been taken in the event of widespread bank runs. The National Banking Era panics and techniques to alleviate them should have been useful references for how to alleviate a financial crisis. We suggest that the overwhelming effort to finance World War I combined with a perspective held by contemporary Federal Reserve officials that the central bank legislation was sufficient to overcome financial crises are key ...