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 ...
Working Paper
The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico
Puerto Rico's unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth ...
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
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
Regressive Welfare Effects of Housing Bubbles
We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers' demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility ...
Briefing
Asset Bubbles and Global Imbalances
What caused the housing boom and bust of the early 2000s? Capital inflows from emerging markets to developed economies can contribute to the formation of bubbles in asset prices. Those bubbles encourage the accumulation of debt, and the deleveraging of that debt exacerbates the decline in economic activity when the bubble bursts.
Briefing
Assessing GSE Mortgage Portfolios’ Exposure to Past and Future Flood Risk
This article evaluates the exposure of government-sponsored enterprises' (GSEs) mortgage portfolios to flood risks as projected by the First Street Foundation and analyzes the realized impact of Hurricane Irma on mortgage defaults. The analysis leverages extensive GSE data spanning from 1999 to 2023 and utilizes risk projections through 2050 to provide a comprehensive view of both potential future risks and actual past outcomes.
Working Paper
Long-term Effects of Redlining on Environmental Risk Exposure
Climate change exacerbates environmental risks such as intensifying extreme precipitation and heat events. Urban design, in turn, can further amplify these background climate stressors through the well-known urban heat island and rainfall effects, which are largely controlled by the local dominance of impervious land covers, surface roughness, and lack of mature tree canopy. While the extent to which present-day exposures and outcomes related to these climate-exacerbated environmental risks in urban areas can be linked to historical policies has received recent attention (Mujahid et al. 2021; ...
Working Paper
Debt Limits and Credit Bubbles in General Equilibrium
We provide a novel characterization of self-enforcing debt limits in a general equilibrium framework of risk sharing with limited commitment, where defaulters are subject to recourse (a fractional loss of current and future endowments) and exclusion from future credit. We show that debt limits are exactly equal to the present value of recourse plus a credit bubble component. We provide applications to models of sovereign debt, private collateralized debt, and domestic public debt. Implications include an original equivalence mapping among distinct institutional arrangements, thereby ...