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Working Paper
The Effects of Macroeconomic Shocks: Household Financial Distress Matters
When a macroeconomic shock arrives, variation in household balance-sheet health (captured by the presence of financial distress “FD”), leads to differential access to credit, and hence a distribution of consumption responses. As we document, though, over the past two recessions, households in prior FD also experienced macroeconomic shocks more intensely than others, leading to a distribution of shock severity. Quantifying the importance of each dimension of heterogeneity (FD or shock severity) for consumption requires a structural model. We find that heterogeneity in FD matters more than ...
Report
Bad credit, no problem? Credit and labor market consequences of bad credit reports
Credit reports are used in nearly all consumer lending decisions and, increasingly, in hiring decisions in the labor market, but the impact of a bad credit report is largely unknown. We study the effects of credit reports on financial and labor market outcomes using a difference-in-differences research design that compares changes in outcomes over time for Chapter 13 filers, whose personal bankruptcy flags are removed from credit reports after seven years, to changes for Chapter 7 filers, whose personal bankruptcy flags are removed from credit reports after ten years. Using credit bureau ...
Working Paper
Losing Public Health Insurance: TennCare Disenrollment and Personal Financial Distress
A main goal of health insurance is to smooth out the financial risk that comes with health shocks and health care. Nevertheless, there has been relatively sparse evidence on how health insurance affects financial outcomes. The few studies that exist focus on the effect of gaining health insurance. This paper explores the effect of losing public health insurance on measures of individual financial well-being. In 2005, the state of Tennessee dropped about 170,000 individuals from Medicaid, resulting in a plausibly exogenous shock to health insurance status. Both across- and within-county ...
Working Paper
On the Measurement of Large Financial Firm Resolvability
We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score ...
Journal Article
What to Do When Large Firms Fail
Highlighted Federal Reserve Bank of Richmond Research: {{p}} "On the Measurement of Large Financial Firm Resolvability." Arantxa Jarque, John R. Walter, and Jackson Evert. Working Paper No. 18-06R, February 2018 (revised July 2018).
Discussion Paper
Some Options for Addressing Puerto Rico’s Fiscal Problems
Puerto Rico’s economic and fiscal challenges have been an important focus of work done here at the New York Fed, resulting in two reports (2012 and 2014), several blog posts and one paper in our Current Issues series in just the last few years. As the Commonwealth’s problems have deepened, the Obama administration and Congress have begun discussing potential approaches to addressing them. In this post, we update our previous estimates of Puerto Rico’s outstanding debt and discuss the effect that various forms of bankruptcy protection might have on the Commonwealth.
Working Paper
Liquidity Windfalls: The Consequences of Repo Rehypothecation
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are ...
Working Paper
The credit card debt puzzle: the role of preferences, credit risk, and financial literacy
We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. This dataset contains unique information on intelligence, financial literacy, and preferences, while also providing a complete picture of households? balance sheets. Relative to individuals with no credit card debt but positive liquid assets, individuals in the puzzle group have higher discount rates, slightly lower financial literacy scores, and very ...
Working Paper
Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform
Bankruptcy reform in 2005 restricted debtors? ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a national sample of credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior in response to the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of ...
Working Paper
Credit, Bankruptcy, and Aggregate Fluctuations
We document the cyclical properties of unsecured consumer credit (procyclical and volatile) and of consumer bankruptcies (countercyclical and very volatile). Using a growth model with household heterogeneity in earnings and assets with access to unsecured credit (because of bankruptcy costs) and aggregate shocks, we show that the cyclical behavior of household earnings growth accounts for these properties, albeit not for the large volatility of credit. We ?nd that tilting household consumption towards goods that can be purchased on credit and a slight countercyclicality in the terms of access ...