Search Results
Working Paper
Bubbly Recessions
We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a ...
Briefing
Pricing and Mispricing of Climate Risks in U.S. Financial Markets
There is a rapidly growing research literature studying the effects of climate change risks on financial markets. Recent evidence suggests that markets have started to price climate risks. However, the extent of pricing varies across markets and time, and there is evidence of potential market inefficiencies. This article will highlight some key findings and their policy implications.
Working Paper
Extreme Weather and the Macroeconomy
Briefing
The Roots of ‘Bubbly’ Recessions
A downturn following the collapse of an asset bubble ? an episode of speculative booms in asset prices ? can be severe and sustained, with output and employment often lower than in the prebubble economy. This Economic Brief considers some possible theoretical explanations. It argues, based on insights from a simple economic model, that the interaction among financial frictions, wage rigidity, and the constraints of monetary policy near the zero lower bound is a key source of inefficiency in large bubbles. One potential remedy is to regulate speculative investment on bubbly assets so that ...
Briefing
How Does Market Competition Affect Banks' Adaptation to Changes in Flood Risks?
This article examines the interplay between market competition and banks' strategic responses to projected long-term changes in flood risks, using data from the home-equity credit market post-Hurricane Harvey. Our work reveals that banks updated their risk models based on exposure to the hurricane, with those in competitive markets less likely to adopt cautious lending practices. It also explores the concept of strategic complementarity, showing that banks' adaptive behaviors are influenced by their competitors. These findings shed insights on how market forces may influence the way banks ...
Working Paper
Race and Environmental Worries
Working Paper
Leveraging the Disagreement on Climate Change: Theory and Evidence
We theoretically and empirically investigate how climate risks affect collateralized debt markets. First, we develop a debt model where agents have different beliefs over a long-run risk. In contrast with existing two-period competitive-equilibrium models, our infinite-horizon competitive-search model predicts more pessimistic agents are more likely to make leveraged investments on risky collateral assets. They also tend to use longer maturity debt contracts, which are more exposed to the long-run risk. Second, employing large data on real estate and mortgage transactions, combined with high ...
Working Paper
Charting the Course: How Does Information about Sea Level Rise Affect the Willingness to Migrate?
An important yet less studied factor in determining the extent of adaptation to climate change is information: are people adequately informed about their vulnerability to future climate-related risks, and does their willingness to adapt depend on this knowledge? Focusing on how communication about projected sea level rise (SLR) affects the willingness to migrate, we implemented a large randomized control survey experiment with a nationally representative sample of more than 7,000 respondents across all provinces in Vietnam. We randomly assign respondents to different information treatments. ...
Briefing
Are Some Homebuyers Strategically Transferring Climate Risks to Lenders?
Recent empirical research suggests that certain homebuyers may be strategically transferring climate risks to banks via the mortgage market, and banks may be transferring such risks to government-sponsored enterprises via securitization. The evidence highlights the nuanced ways in which participants in the financial markets strategically adapt to climate change.