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Working Paper
Asset Pledgeability and Endogenously Leveraged Bubbles
We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may ...
Speech
Evolving consumer behavior: remarks at the National Retail Federation Annual Convention, Jacob K. Javits Convention Center, New York City
Remarks at the National Retail Federation Annual Convention, Jacob K. Javits Convention Center, New York City.
Working Paper
Interest Rates or Haircuts? Prices Versus Quantities in the Market for Collateralized Risky Loans
Markets for risky loans clear on two dimensions - an interest rate (or equivalently a spread above the riskless rate) and a specification of the amount of collateral per dollar of lending. The latter is summarized by the margin or "haircut" associated with the loan. Some key models of endogenous collateral constraints imply that the primary equilibrating force will be in the form of haircuts rather than movements in interest rate spreads. Indeed, an important benchmark model, derived in a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of ...
Working Paper
Rehypothecation and Liquidity
We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as ...
Working Paper
Debt Deflation Effects of Monetary Policy
This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation ...
Working Paper
Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium
We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%?90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, ...
Newsletter
Neighborhood Redlining, Racial Segregation, and Homeownership
Redlining was the practice of selectively classifying neighborhoods as most likely to default on repayment of a mortgage loan. Houses in redlined neighborhoods held little value as collateral, and lenders would only offer mortgage loans for these houses at above-average interest rates. Over time, these neighborhoods had the largest concentrations of African Americans. The September 2021 issue of Page One Economics explains how residents in redlined neighborhoods could not afford to become homeowners and accumulate wealth at the rates other groups did. It also points out how only when the ...
Working Paper
Homeowner Balance Sheets and Monetary Policy
This paper empirically identifies an important channel through which monetary policy affects consumer spending: homeowner balance sheets. A monetary loosening increases home values, thereby strengthening homeowner balance sheets and stimulating household spending due to a combination of collateral and wealth effects. The magnitude of these effects on a given household depends on local housing market characteristics such as local geography and regulation. Cities with the largest geographic and regulatory barriers to new construction see 3-4 percent responses in real house prices compared with ...
Newsletter
On the Move: Mortgage Basics
Buying a home is a major financial decision, and for young people in particular the entire process can seem overwhelming. Learn about mortgages and the steps people can take early in life to prepare themselves financially to buy a home, in this February 2022 issue of Page One Economics: Focus on Finance.
Report
A Dynamic Theory of Collateral Quality and Long-Term Interventions
We study a dynamic model of collateralized lending under adverse selection in which the quality of collateral assets is endogenously determined by hidden effort. Complementarities in incentives lead to non-ergodic dynamics: Asset quality and output grow when asset quality is high, but stagnate or deteriorate otherwise. Inefficiencies remain, even in the most efficient competitive equilibrium?investment and output are vulnerable to spells of lending market illiquidity, and these spells may persist because of suboptimal effort. Nevertheless, benevolent regulators without commitment can destroy ...