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Working Paper
The cost of business cycles with heterogeneous trading technologies
This paper investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the ...
Working Paper
Optimal Debt Dynamics, Issuance Costs, and Commitment
We investigate optimal capital structure and debt maturity policies in the presence of fixed issuance costs. We identify the global-optimal policy that generates the highest values of equity across all states of nature consistent with limited liability. The optimal policy without commitment provides almost as much tax benefits to debt as does the global-optimal policy and, in the limit of vanishing issuance costs, allows firms to extract 100% of EBIT. This limiting case does not converge to the equilibrium of DeMarzo and He (2019), who report no tax benefits to debt when issuance costs are ...
Working Paper
The Role of Learning for Asset Prices and Business Cycles
I examine the implications of learning-based asset pricing in a model in which firms face credit constraints that depend partly on their market value. Agents learn about stock prices, but have conditionally model-consistent expectations otherwise. The model jointly matches key asset price and business cycle statistics, while the combination of financial frictions and learning produces powerful feedback between asset prices and real activity, adding substantial amplification. The model reproduces many patterns of forecast error predictability in survey data that are inconsistent with rational ...
Working Paper
The Equity Premium, Long-Run Risk, & Optimal Monetary Policy
In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated ...
Working Paper
SONOMA: a Small Open ecoNOmy for MAcrofinance
We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity.
Working Paper
Mining for Oil Forecasts
In this paper, we study the usefulness of a large number of traditional determinants and novel text-based variables for in-sample and out-of-sample forecasting of oil spot and futures returns, energy company stock returns, oil price volatility, oil production, and oil inventories. After carefully controlling for small-sample biases, we find compelling evidence of in-sample predictability. Our text measures hold their own against traditional variables for oil forecasting. However, none of this translates to out-of-sample predictability until we data mine our set of predictive variables. Our ...