Search Results
Journal Article
Loan Guarantees for Consumer Credit Markets
A significant share of U.S. households appears strongly affected by credit constraints. These households typically lack pledgable collateral, making unsecured credit markets essential for their consumption-smoothing efforts in the face of life-cycle income variation and uninsurable risk. Recent work suggests, however, that these markets are significantly affected by limited-commitment and private-information frictions. In this article, we study the potential for guarantees on consumer loans to improve allocations in unsecured credit markets. Loan guarantees are already among the most widely ...
Working Paper
What Explains Neighborhood Sorting by Income and Race?
Why do high-income black households live in neighborhoods with characteristics similar to those of low-income white households? We find that neighborhood sorting by income and race cannot be explained by financial constraints: High-income, high-wealth black households live in similar-quality neighborhoods as low-income, low-wealth white households. We provide evidence that black households sort across neighborhoods according to some non-pecuniary factor(s) correlated with the racial composition of neighborhoods. Black households sorting into black neighborhoods can explain the racial gap in ...
Working Paper
Government Debt Limits and Stabilization Policy
We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at ...
Working Paper
Growth and Welfare Gains from Financial Integration Under Model Uncertainty
We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this ...
Working Paper
Production and Inventory Dynamics under Ambiguity Aversion
We propose a production-cost smoothing model with Knightian uncertainty due to ambiguity aversion to study the joint behavior of production, inventories, and sales. Our model can explain four facts that previous studies find difficult to account for simultaneously: (i) the high volatility of production relative to sales, (ii) the low ratio of inventory-investment volatility to sales volatility, (iii) the positive correlation between sales and inventories, and (iv) the negative correlation between the inventory-to-sales ratio and sales. We find that the stock-out avoidance motive (Kahn 1987) ...
Working Paper
The Piketty Transition
We study the effects on inequality of a "Piketty transition" to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and the effect is negative. Finally, following Piketty?s thought experiment, we study how the transition might occur without declining returns; ...
Working Paper
Model uncertainty and intertemporal tax smoothing
In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and debt structure in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB can improve the model?s predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending and (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government ...
Working Paper
Robustness, information-processing constraints, and the current account in small open economies
We examine the effects of two types of informational frictions, robustness (RB) and nite information-processing capacity (called rational inattention or RI) on the current account, in an otherwise standard intertemporal current account (ICA) model. We show that the interaction of RB and RI has the potential to improve the model?s predictions on the joint dynamics of the current account and income: (i) the contemporaneous correlation between the current account and income, (ii) the volatility and persistence of the current account in small open emerging and developed economies. In addition, we ...
Journal Article
The Racial Wealth Gap and Access to Opportunity Neighborhoods
Some Black households live in neighborhoods with lower incomes, as well as higher unemployment rates and lower educational attainment, than their own incomes might suggest, and this may impede their economic mobility. We investigate reasons for the neighborhood sorting patterns we observe and find that differences in financial factors such as income, wealth, or housing costs between Black and white households do not explain racial distributions across neighborhoods. Our findings suggest other factors are at work, including discrimination in the housing market, ongoing racial hostility, or ...
Working Paper
Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus
We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality or high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Our theoretical framework predicts that ...