Amir Sufi

New: A Goldilocks Theory of Fiscal Deficits
Date Posted:Thu, 03 Feb 2022 09:16:04 -0600
This paper proposes a tractable framework to analyze fiscal space and the dynamics of government debt, with a possibly binding zero lower bound (ZLB) constraint. Without the ZLB, a greater primary deficit unambiguously raises debt. However, debt need not explode: When R < G – f, where f is the sensitivity of R – G to debt, a modest permanent increase in the deficit can be sustained forever, a policy we call “free lunch”. With the ZLB, the relationship between deficit and debt can become non-monotone. Both high and low deficits can increase debt, as the latter weaken demand and reduce nominal growth at the ZLB. A rise in income inequality expands fiscal space outside the ZLB, but contracts it at the ZLB. Calibrating the model, we find little space for “free lunch” policies for the United States in 2019, but ample space for Japan.

New: Household Credit as Stimulus? Evidence from Brazil
Date Posted:Mon, 01 Nov 2021 12:05:10 -0500
From 2011 to 2014, the Brazilian government conducted a heavily advertised major credit expansion program through government banks as part of its effort to stimulate the economy. Using administrative data on individual-level borrowing and spending, we find that the program led to a substantial rise in borrowing by government employees, especially those with low financial literacy. We trace the impact of credit stimulus on borrowers’ consumption through the 2011-16 business cycle, and find that the credit stimulus resulted in higher consumption volatility and lower average consumption over the cycle. Our results suggest a potential downside of using household credit as stimulus in emerging markets.

New: Falling Rates and Rising Superstars
Date Posted:Wed, 20 Oct 2021 09:00:14 -0500
Do low interest rates contribute to the rise in market concentration? Using data on firm financials and high frequency monetary policy shocks, we find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low. Falling rates raise the valuation of industry leaders relative to industry followers and this effect snowballs as the interest rate approaches zero. There are multiple channels through which falling rates disproportionately benefit industry leaders: (i) the cost of borrowing falls more for industry leaders, (ii) industry leaders are able to raise more debt, increase leverage, and buyback more shares, and (iii) capital investment and acquisitions increase more for industry leaders. All three of these effects also snowball as the interest rate approaches zero. The findings provide empirical support to the idea that extremely low interest rates and the rise of superstar firms are connected.

REVISION: What Explains the Decline in r*? Rising Income Inequality Versus Demographic Shifts
Date Posted:Mon, 04 Oct 2021 16:40:03 -0500
Downward pressure on the natural rate of interest (r*) is often attributed to an increase in saving. This study uses microeconomic data from the SCF+ to explore the relative importance of demographic shifts versus rising income inequality on the evolution of saving behavior in the United States from 1950 to 2019. The evidence suggests that rising income inequality is more important than the aging of the baby boom generation in explaining the decline in r*. Saving rates are significantly higher for high income households within a given birth cohort relative to other households in the same birth cohort, and there has been a large rise in income shares for high income households since the 1980s. The result has been a large rise in saving by high income earners since the 1980s, which is the exact same time period during which r* has fallen. Differences in saving rates across the working age distribution are smaller, and there has not been a consistent monotonic shift in income toward any ...

REVISION: What Explains the Decline in r*? Rising Income Inequality Versus Demographic Shifts
Date Posted:Fri, 03 Sep 2021 10:25:33 -0500
Downward pressure on the natural rate of interest (r*) is often attributed to an increase in saving. This study uses microeconomic data from the SCF+ to explore the relative importance of demographic shifts versus rising income inequality on the evolution of saving behavior in the United States from 1950 to 2019. The evidence suggests that rising income inequality is the more important factor explaining the decline in r*. Saving rates are significantly higher for high income households within a given birth cohort relative to middle and low income households in the same birth cohort, and there has been a large rise in income shares for high income households since the 1980s. The result has been a large rise in saving by high income earners since the 1980s, which is the exact same time period during which r* has fallen. Differences in saving rates across the working age distribution are smaller, and there has not been a consistent monotonic shift in income toward any given age group. ...

New: Financial Crises: A Survey
Date Posted:Wed, 18 Aug 2021 05:42:13 -0500
Financial crises have large deleterious effects on economic activity, and as such have been the focus of a large body of research. This study surveys the existing literature on financial crises, exploring how crises are measured, whether they are predictable, and why they are associated with economic contractions. Historical narrative techniques continue to form the backbone for measuring crises, but there have been exciting developments in using quantitative data as well. Crises are predictable with growth in credit and elevated asset prices playing an especially important role; recent research points convincingly to the importance of behavioral biases in explaining such predictability. The negative consequences of a crisis are due to both the crisis itself but also to the imbalances that precede a crisis. Crises do not occur randomly, and, as a result, an understanding of financial crises requires an investigation into the booms that precede them.

REVISION: Low Interest Rates, Market Power, and Productivity Growth
Date Posted:Wed, 19 Aug 2020 03:39:09 -0500
This study provides a new theoretical result that a decline in the long-term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for anti-trust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.

REVISION: Low Interest Rates, Market Power, and Productivity Growth
Date Posted:Fri, 02 Aug 2019 15:26:26 -0500
This study provides a new theoretical result that low interest rates encourage market concentration by raising industry leaders’ incentive to gain a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced business dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model’s key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

REVISION: How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels
Date Posted:Sat, 08 Jun 2019 09:10:21 -0500
Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. This study develops an empirical test to determine whether the household demand channel of credit supply expansion is present, and it implements the test using both a natural experiment in the United States in the 1980s based on banking deregulation and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, credit supply expansion boosts non-tradable sector employment and the price of non-tradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle, leading to more severe recessions.

REVISION: Low Interest Rates, Market Power, and Productivity Growth
Date Posted:Thu, 04 Apr 2019 15:43:27 -0500
How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model's key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

REVISION: Credit Supply and Housing Speculation
Date Posted:Wed, 03 Apr 2019 13:20:05 -0500
Speculation is a critical channel through which credit supply expansion affects the housing cycle. The surge in private label mortgage securitization in 2003 fueled a large expansion in mortgage credit supply by lenders financed with non-core deposits. Areas more exposed to these lenders experienced a large relative rise in transaction volume driven by a small group of speculators, and these areas simultaneously witnessed an amplified housing boom and bust. Consistent with the importance of belief heterogeneity, house price growth expectations of marginal buyers rose during the boom, while housing market pessimism among the general population increased.

REVISION: Credit Supply and Housing Speculation
Date Posted:Thu, 28 Mar 2019 13:35:05 -0500
Speculation is a critical channel through which credit supply expansion affects the housing cycle. The surge in private label mortgage securitization in 2003 fueled a large expansion in mortgage credit supply by lenders financed with non-core deposits. Areas more exposed to these lenders experienced a large relative rise in transaction volume driven by a small group of speculators, and these areas simultaneously witnessed an amplified housing boom and bust. Consistent with the importance of belief heterogeneity, house price growth expectations of marginal buyers rose during the boom, while housing market pessimism among the general population increased.

New: Low Interest Rates, Market Power, and Productivity Growth
Date Posted:Mon, 04 Feb 2019 11:02:44 -0600
How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model's key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

REVISION: Low Interest Rates, Market Power, and Productivity Growth
Date Posted:Mon, 04 Feb 2019 09:50:43 -0600
How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model's key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

New: Household Debt and Recession in Brazil
Date Posted:Thu, 01 Nov 2018 06:50:06 -0500
Brazil experienced one of the most severe recessions in its history from 2014 to 2016. Following a pattern shown for previous economic downturns in other countries, the Brazilian recession was preceded by a substantial increase in household debt from 2003 to 2014. This study utilizes a novel individual level data set on household borrowing in order to provide details of the household debt boom. The data set allows for a decomposition of the rise in household debt by the type of debt and by the source of debt, and it allows for an analysis of the income of individuals taking on more debt during the boom. We conclude with an exploration of potential causes of the rise in household debt.

REVISION: How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels
Date Posted:Sun, 05 Aug 2018 03:37:48 -0500
Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. This study develops an empirical test to determine which channel dominates and implements the test using both a natural experiment in the United States in the 1980s based on banking deregulation and an international panel of 56 countries over the last several decades. In support of the household demand channel, credit supply expansion boosts household debt, non-tradable sector employment, and the price of non-tradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle, leading to more severe recessions.

Update: Credit Supply and Housing Speculation
Date Posted:Fri, 27 Jul 2018 05:23:24 -0500
Credit supply expansion fuels housing speculation, generating a boom and bust in house prices. U.S. zip codes more exposed to the 2003 acceleration of the private label mortgage securitization (PLS) market witnessed a sudden and large increase in mortgage originations and house prices from 2003 to 2006, followed by a collapse in house prices from 2006 to 2010. During the boom, cities with higher PLS-market exposure were more likely to see a large increase in house prices despite substantial new construction; these cities experienced a severe bust after 2006. Most of the marginal home-buyers brought into the housing market by the acceleration of the PLS market were short-term buyers or "flippers." These marginal buyers had lower credit scores and higher ex post default rates. Speculation by such home-buyers contributed to a large rise in transaction volume from 2003 to 2006, and helped trigger the mortgage default crisis in 2007.

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REVISION: Credit Supply and Housing Speculation
Date Posted:Fri, 27 Jul 2018 05:18:04 -0500
Credit supply expansion fuels housing speculation, generating a boom and bust in house prices. U.S. zip codes more exposed to the 2003 acceleration of the private label mortgage securitization (PLS) market witnessed a sudden and large increase in mortgage origanizations and house prices from 2003 to 2006, followed by a collapse in house prices from 2006 to 2010. During the boom, cities with higher PLS-market exposure were more likely to see a large increase in house prices despite substantial new construction; these cities experienced a severe bust after 2006. Most of the marginal home-buyers brought into the housing market by the acceleration of the PLS market were short-term buyers or "flippers.' These marginal buyers had lower credit scores and higher ex post default rates. Speculation by such home-buyers contributed to a large rise in transaction volume from 2003 to 2006, and helped trigger the mortgage default crisis in 2007.

REVISION: Finance and Business Cycles: The Credit-Driven Household Demand Channel
Date Posted:Sun, 13 May 2018 04:49:20 -0500
What is the role of the financial sector in explaining business cycles? This question is as old as the field of macroeconomics, and an extensive body of research conducted since the Global Financial Crisis of 2008 has offered new answers. The specific idea put forward in this article is that expansions in credit supply, operating primarily through household demand, have been an important driver of business cycles. We call this the credit-driven household demand channel. While this channel helps explain the recent global recession, it also describes economic cycles in many countries over the past 40 years.

REVISION: Partisan Bias, Economic Expectations, and Household Spending
Date Posted:Thu, 12 Apr 2018 13:28:19 -0500
The well-documented rise in political polarization among the U.S. electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on survey-based measures of economic expectations. Individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party that controls the White House, and this tendency has increased significantly over time. Individuals report a large shift in economic expectations based on partisan affiliation after the 2008 and 2016 elections, but administrative data on spending shows no effect of these shifts on actual household spending.

REVISION: Finance and Business Cycles: The Credit-Driven Household Demand Channel
Date Posted:Sun, 25 Feb 2018 03:19:41 -0600
Every major financial crisis leaves its unique footprint on economic thought. The early banking crises taught us the importance of financial sector liquidity and the lender of last resort. The Great Depression highlighted the devastating effects of bank failures and the need for counter-cyclical fiscal and monetary policy. The Great Recession has brought to the surface the importance of credit-driven business cycles that operate through household demand. We discuss empirical evidence accumulated over the last decade supporting this view, and we also describe accompanying theoretical work that helps define these concepts.

REVISION: How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s
Date Posted:Tue, 24 Oct 2017 12:17:31 -0500
We study the business cycle consequences of credit supply expansion in the U.S. The 1980's credit boom resulted in stronger credit expansion in more deregulated states, and these states experience a more amplified business cycle. A new test shows that amplification is primarily driven by the local demand rather than the production capacity channel. States with greater exposure to credit expansion experience larger increases in household debt, the relative price of non-tradable goods, nominal wages, and non-tradable employment. Yet there is no change in tradable sector employment. Eventually states with greater exposure to credit expansion experience a significantly deeper recession.

REVISION: Partisan Bias, Economic Expectations, and Household Spending
Date Posted:Thu, 14 Sep 2017 07:21:26 -0500
The well-documented rise in political polarization among the U.S. electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on survey-based measures of economic expectations. Individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party that controls the White House. Further, individuals see a sharp rise in relative optimism when the party they support wins the Presidency. Both of these effects are becoming larger over time. Using administrative household spending data, we are unable to find evidence that those most likely to support the winning candidate increased spending after any of the elections. For example, despite the substantial rise in survey-based measures of economic expectations among those most likely to support Donald Trump since November 2016, we are unable to detect higher actual spending on auto purchases among this group after the election. Partisan ...

REVISION: How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s
Date Posted:Fri, 25 Aug 2017 11:12:13 -0500
Does an expansion in credit supply affect the economy by increasing productive capacity, or by boosting demand? We design a test to uncover which of the two channels is more dominant, and we apply it to the United States in the 1980s where the degree of banking deregulation generated differential local credit supply shocks across states. The stronger expansion in credit supply in early deregulation states primarily boosted local demand, especially by households, as opposed to improving labor productivity of firms. States with a more deregulated banking sector see a large relative increase in household debt from 1983 to 1989, which is accompanied by an increase in the price of non-tradable relative to tradable goods, an increase in wages in all sectors, an increase in non-tradable employment, and no change in tradable employment. Credit supply shocks lead to an amplified business cycle, with GDP, employment, residential investment, and house prices increasing by more in early ...

REVISION: Partisan Bias, Economic Expectations, and Household Spending
Date Posted:Fri, 14 Jul 2017 10:29:33 -0500
Individuals who support the winning candidate in U.S. Presidential elections become significantly more optimistic about the economy after the election, a phenomenon we utilize to measure the effect of partisan bias on economic expectations. The well-documented rise in political polarization among the electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on economic expectations. The culmination of this trend is the unprecedented 1.8 standard deviation increase in relative economic optimism for those supporting the candidacy of Donald Trump after November 2016. The Trump effect is six times larger than the increase in relative economic optimism for those supporting George W. Bush in 2000. We investigate spending behavior using a variety of measures, and we are unable to find evidence that those most likely to support the winning candidate increased spending after any of the elections. For example, despite the substantial rise ...

REVISION: How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s
Date Posted:Sat, 20 May 2017 11:46:07 -0500
We explore the 1982 to 1992 business cycle in the United States, exploiting variation across states in the degree of banking deregulation to generate differential local credit supply shocks. We show that expansion in credit supply operates primarily by boosting local demand, especially by households, as opposed to improving labor productivity of firms. States with a more deregulated banking sector see a large relative increase in household debt from 1983 to 1989, which is accompanied by an increase in the price of non-tradable relative to tradable goods, an increase in wages in all sectors, an increase in non-tradable employment, and no change in tradable employment. Credit supply shocks lead to an amplified business cycle, with GDP, employment, residential investment, and house prices increasing by more in early deregulation states during the expansion, and then subsequently falling more during the recession of 1990 and 1991. The worse recession outcomes in early deregulation states ...

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Thu, 09 Feb 2017 13:15:29 -0600
An increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Thu, 13 Oct 2016 12:31:20 -0500
An increase in the household debt to GDP ratio predicts lower subsequent GDP growth and higher unemployment in an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes and those closer to the zero lower bound on nominal interest rates. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an ...

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Tue, 13 Sep 2016 15:49:02 -0500
An increase in the household debt to GDP ratio in the medium run predicts lower subsequent GDP growth, higher unemployment, and negative growth forecasting errors in a panel of 30 countries from 1960 to 2012. Consistent with the "credit supply hypothesis," we show that low mortgage spreads predict an increase in the household debt to GDP ratio and a decline in subsequent GDP growth when used as an instrument. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries that face stricter monetary policy constraints as measured by a less flexible exchange rate regime, proximity to the zero lower bound, or more external borrowing. A rise in the household debt to GDP ratio is contemporaneously associated with a consumption boom followed by a reversal in the trade deficit as imports collapse. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a ...

REVISION: Household Debt and Defaults from 2000 to 2010: The Credit Supply View
Date Posted:Fri, 17 Jun 2016 12:15:05 -0500
During the first decade of the 21st century, the United States witnessed a dramatic rise in household debt followed by a severe default crisis. In this study, we review the existing literature and provide new evidence supporting the credit supply view of the episode, which holds that an increase in credit supply unrelated to fundamental improvements in income or productivity was the shock that initiated the household debt boom and bust. The credit supply view is supported by four facts: First, from 2002 to 2005, there was an expansion of mortgage credit supply that was independent of improved economic circumstances. This can most easily be seen in the increased number of mortgages for home purchase originated to marginal households, or households that previously were routinely denied mortgage credit. Second, the expansion in mortgage credit supply increased house prices. Third, existing homeowners responded to rising house prices by borrowing aggressively out of home equity; such ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Fri, 17 Jun 2016 12:03:59 -0500
Treating fraudulently overstated income on mortgage applications as true income leads to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005. A positive gap between zip-code level income growth calculated from mortgage applications and income growth from the IRS likely reflects mortgage fraud, not an improvement in home-buyer income. In support of the credit supply view, mortgage credit for home purchase expanded significantly more in low credit score neighborhoods on both the extensive and intensive margin from 2002 to 2005, even though these neighborhoods deteriorated on many measures of income prospects.

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Fri, 17 Jun 2016 12:00:34 -0500
Treating fraudulently overstated income on mortgage applications as true income leads to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005. A positive gap between zip-code level income growth calculated from mortgage applications and income growth from the IRS likely reflects mortgage fraud, not an improvement in home-buyer income. In support of the credit supply view, mortgage credit for home purchase expanded significantly more in low credit score neighborhoods on both the extensive and intensive margin from 2002 to 2005, even though these neighborhoods deteriorated on many measures of income prospects.

REVISION: Household Debt and Defaults from 2000 to 2010: The Credit Supply View
Date Posted:Fri, 17 Jun 2016 11:58:58 -0500
During the first decade of the 21st century, the United States witnessed a dramatic rise in household debt followed by a severe default crisis. In this study, we review the existing literature and provide new evidence supporting the credit supply view of the episode, which holds that an increase in credit supply unrelated to fundamental improvements in income or productivity was the shock that initiated the household debt boom and bust. The credit supply view is supported by four facts: First, from 2002 to 2005, there was an expansion of mortgage credit supply that was independent of improved economic circumstances. This can most easily be seen in the increased number of mortgages for home purchase originated to marginal households, or households that previously were routinely denied mortgage credit. Second, the expansion in mortgage credit supply increased house prices. Third, existing homeowners responded to rising house prices by borrowing aggressively out of home equity; such ...

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Fri, 03 Jun 2016 13:34:53 -0500
An increase in the household debt to GDP ratio in the medium run predicts lower subsequent GDP growth, higher unemployment, and negative growth forecasting errors in a panel of 30 countries from 1960 to 2012. Consistent with the "credit supply hypothesis," we show that low mortgage spreads predict an increase in the household debt to GDP ratio and a decline in subsequent GDP growth when used as an instrument. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries that face stricter monetary policy constraints as measured by a less flexible exchange rate regime, proximity to the zero lower bound, or more external borrowing. A rise in the household debt to GDP ratio is contemporaneously associated with a consumption boom followed by a reversal in the trade deficit as imports collapse. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a ...

REVISION: Household Debt and Defaults from 2000 to 2010: The Credit Supply View
Date Posted:Wed, 04 May 2016 01:17:50 -0500
During the first decade of the 21st century, the United States witnessed a dramatic rise in household debt followed by a severe default crisis. In this study, we review the existing literature and provide new evidence supporting the credit supply view of the episode, which holds that an increase in credit supply unrelated to fundamental improvements in income or productivity was the shock that initiated the household debt boom and bust. The credit supply view is supported by four facts: First, from 2002 to 2005, there was an expansion of mortgage credit supply that was independent of improved economic circumstances. This can most easily be seen in the increased number of mortgages for home purchase originated to marginal households, or households that previously were routinely denied mortgage credit. Second, the expansion in mortgage credit supply increased house prices. Third, existing homeowners responded to rising house prices by borrowing aggressively out of home equity; such ...

REVISION: Household Debt and Defaults from 2000 to 2010: The Credit Supply View
Date Posted:Wed, 04 May 2016 01:07:10 -0500
During the first decade of the 21st century, the United States witnessed a dramatic rise in household debt followed by a severe default crisis. In this study, we review the existing literature and provide new evidence supporting the credit supply view of the episode, which holds that an increase in credit supply unrelated to fundamental improvements in income or productivity was the shock that initiated the household debt boom and bust. The credit supply view is supported by four facts: First, from 2002 to 2005, there was an expansion of mortgage credit supply that was independent of improved economic circumstances. This can most easily be seen in the increased number of mortgages for home purchase originated to marginal households, or households that previously were routinely denied mortgage credit. Second, the expansion in mortgage credit supply increased house prices. Third, existing homeowners responded to rising house prices by borrowing aggressively out of home equity; such ...

REVISION: House Price Gains and U.S. Household Spending from 2002 to 2006
Date Posted:Wed, 30 Mar 2016 09:04:45 -0500
We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Wed, 30 Mar 2016 09:02:48 -0500
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: Household Debt and Defaults from 2000 to 2010: Facts from Credit Bureau Data
Date Posted:Wed, 30 Mar 2016 09:01:44 -0500
We use individual level credit bureau data to document which individuals saw the biggest rise in household debt from 2000 to 2007 and the biggest rise in defaults from 2007 to 2010. Growth in household debt from 2000 to 2007 was substantially larger for individuals with the lowest initial credit scores. However, initial debt levels were lower for individuals in the lowest 20% of the initial credit score distribution. As a result, the contribution to the total dollar rise in household debt was strongest among individuals in the 20th to 60th percentile of the initial credit score distribution. Consistent with the importance of home-equity based borrowing, the increase in debt is especially large among individuals in the lowest 60% of the credit score distribution living in high house price growth zip codes. In contrast, the borrowing of individuals in the top 20% of the credit score distribution is completely unresponsive to higher house price growth. In terms of defaults, the evidence ...

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Fri, 29 Jan 2016 06:40:51 -0600
A rise in the household debt to GDP ratio predicts lower output growth and a higher unemployment rate over the medium-run, contrary to standard open economy macroeconomic models in which an increase in debt is driven by news of better future income prospects. GDP forecasts by the IMF and OECD underestimate the importance of a rise in household debt to GDP, giving the change in the household debt to GDP ratio of a country the ability to predict growth forecasting errors. The predictive power of a rise in household debt to GDP ratios is significantly stronger in countries with a fixed exchange rate and countries with a floating exchange rate but against the zero lower bound on nominal interest rates. A rise in household debt to GDP is associated contemporaneously with a rising consumption share of output, a worsening of the current account balance, and a rise in the share of consumption goods within imports. Taken together, these results are consistent with demand externality models ...

REVISION: Household Debt and Defaults from 2000 to 2010: Facts from Credit Bureau Data
Date Posted:Tue, 03 Nov 2015 07:02:23 -0600
We use individual level credit bureau data to document which individuals saw the biggest rise in household debt from 2000 to 2007 and the biggest rise in defaults from 2007 to 2010. Growth in household debt from 2000 to 2007 was substantially larger for individuals with the lowest initial credit scores. However, initial debt levels were lower for individuals in the lowest 20% of the initial credit score distribution. As a result, the contribution to the total dollar rise in household debt was strongest among individuals in the 20th to 60th percentile of the initial credit score distribution. Consistent with the importance of home-equity based borrowing, the increase in debt is especially large among individuals in the lowest 60% of the credit score distribution living in high house price growth zip codes. In contrast, the borrowing of individuals in the top 20% of the credit score distribution is completely unresponsive to higher house price growth. In terms of defaults, the evidence ...

REVISION: Household Debt and Business Cycles Worldwide
Date Posted:Sat, 05 Sep 2015 05:27:19 -0500
A rise in the household debt to GDP ratio predicts lower output growth and higher unemployment over the medium-run, contrary to standard macroeconomic models. GDP forecasts by the IMF and OECD underestimate the importance of a rise in household debt to GDP, giving the change in household debt to GDP ratio of a country the ability to predict growth forecasting errors. We use lower credit spreads and increases in risky debt issuance as instruments for the rise in household debt to GDP to argue that our results are supportive of recent models where debt growth is driven by changes in credit supply, borrowing constraints, or risk premia. We also show that a rise in household debt to GDP is associated contemporaneously with a rising consumption share of output, a worsening of the current account balance, and a rise in the share of consumption goods within imports. This is followed by strong external adjustment when the economy slows as the current account reverses and net exports increase ...

REVISION: Household Debt and Defaults from 2000 to 2010: Facts from Credit Bureau Data
Date Posted:Fri, 17 Jul 2015 05:34:42 -0500
We use individual level credit bureau data to document which individuals saw the biggest rise in household debt from 2000 to 2007 and the biggest rise in defaults from 2007 to 2010. Growth in household debt from 2000 to 2007 was substantially larger for individuals with the lowest initial credit scores. However, initial debt levels were lower for individuals in the lowest 20% of the initial credit score distribution. As a result, the contribution to the total dollar rise in household debt was strongest among individuals in the 20th to 60th percentile of the initial credit score distribution. Consistent with the importance of home-equity based borrowing, the increase in debt is especially large among individuals in the lowest 60% of the credit score distribution living in high house price growth zip codes. In contrast, the borrowing of individuals in the top 20% of the credit score distribution is completely unresponsive to higher house price growth. In terms of defaults, the evidence ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Fri, 17 Jul 2015 05:24:53 -0500
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: Government Economic Policy, Sentiments, and Consumption
Date Posted:Sun, 21 Jun 2015 04:01:19 -0500
We examine how consumption responds to changes in sentiment regarding government economic policy using cross-sectional variation across counties in the ideological predisposition of constituents. When the incumbent party loses a presidential election, individuals in counties more ideologically predisposed toward the losing party experience a dramatic and discontinuous relative decrease in optimism on government economic policy. Using the interaction of constituent ideology in a county with election timing as an instrument, we estimate the impact of government policy sentiment shocks on consumer spending, and we find a very small effect that cannot be statistically distinguished from zero. The small magnitude of the effect is estimated precisely. For example, we can reject the hypothesis that pessimism regarding government economic policy effectiveness during the Great Recession had as large an effect on consumption as the negative shock to household net worth coming from the collapse ...

REVISION: Household Debt and Defaults from 2000 to 2010: Facts from Credit Bureau Data
Date Posted:Sat, 16 May 2015 23:46:44 -0500
We use individual level credit bureau data to document which individuals saw the biggest rise in household debt from 2000 to 2007 and the biggest rise in defaults from 2007 to 2010. Growth in household debt from 2000 to 2007 was substantially larger for individuals with the lowest initial credit scores. However, initial debt levels were lower for individuals in the lowest 20% of the initial credit score distribution. As a result, the contribution to the total dollar rise in household debt was strongest among individuals in the 20th to 60th percentile of the initial credit score distribution. Consistent with the importance of home-equity based borrowing, the increase in debt is especially large among individuals in the lowest 60% of the credit score distribution living in high house price growth zip codes. In contrast, the borrowing of individuals in the top 20% of the credit score distribution is completely unresponsive to higher house price growth. In terms of defaults, the evidence ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Sat, 16 May 2015 00:17:38 -0500
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Mon, 06 Apr 2015 22:38:36 -0500
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Thu, 19 Feb 2015 02:17:12 -0600
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005
Date Posted:Sun, 08 Feb 2015 00:22:09 -0600
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the ...

REVISION: House Price Gains and U.S. Household Spending from 2002 to 2006
Date Posted:Wed, 23 Jul 2014 03:58:39 -0500
We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.

REVISION: House Price Gains and U.S. Household Spending from 2002 to 2006
Date Posted:Sat, 17 May 2014 08:57:13 -0500
We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.

REVISION: House Price Gains and U.S. Household Spending from 2002 to 2006
Date Posted:Sat, 22 Mar 2014 07:54:48 -0500
We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they also increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. This cross-derivative is consistent with models where house price changes act as cash-on-hand shocks to low cash-on-hand households, who have a high marginal propensity to consume out of such shocks. Almost all of the spending out of housing wealth is through the home-equity borrowing channel. These results are unlikely to be driven by unobservable changes in non-housing wealth, given that low income zip codes are experiencing lower wage growth during this period. After 2006, the households that borrowed and spent the most aggressively out of housing wealth during the boom experience lower income and ...

REVISION: What Explains the 2007-2009 Drop in Employment?
Date Posted:Sat, 01 Mar 2014 03:32:34 -0600
We show that deterioration in household balance sheets, what we refer to as the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Using geographical variation across U.S. counties, we show that counties with a larger decline in housing net worth experience a larger decline in non-tradable employment. This result is not driven by industry-specific supply-side shocks, exposure to the construction sector, policy-induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no expansion in the tradable sector in affected counties, and the correlation between the housing net worth decline and job losses in the tradable sector is zero. There is no evidence of wage adjustment, or of net labor emigration out of affected counties either.

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Sat, 01 Feb 2014 01:45:32 -0600
From 2007 to 2009, states without a judicial requirement for foreclosures were more than twice as likely to foreclose on delinquent homeowners. Comparing zip codes close to state borders with differing foreclosure laws, we show that foreclosure propensity and housing inventory jumped discretely as one entered non-judicial states. There is no jump in other homeowner attributes such as credit scores, income, or education levels. Using state judicial requirement as an instrument for foreclosures, we show that foreclosures led to a large decline in house prices, residential investment, and consumer demand from 2007 to 2009. As foreclosures subsided from 2011 to 2013, the difference between foreclosure rates in non-judicial and judicial requirement states shrank and we find evidence of a stronger recovery in non-judicial states.

REVISION: Dynamic Risk Management
Date Posted:Sat, 07 Sep 2013 14:52:15 -0500
Both financing and risk management involve promises to pay that need to be collateralized, resulting in a financing versus risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We show that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: Dynamic Risk Management
Date Posted:Tue, 11 Jun 2013 17:37:49 -0500
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: Household Balance Sheets, Consumption, and the Economic Slump
Date Posted:Fri, 07 Jun 2013 14:35:50 -0500
We investigate the consumption consequences of the 2006 to 2009 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5 to 7 cents with substantial heterogeneity across zip codes. Zip codes with poorer ...

REVISION: What Explains High Unemployment? The Aggregate Demand Channel
Date Posted:Sun, 07 Apr 2013 09:05:43 -0500
A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand hypothesis for employment losses makes the joint prediction that job losses in the non-tradable sector will be higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector will be distributed uniformly across all counties. We find exactly ...

REVISION: Household Balance Sheets, Consumption, and the Economic Slump
Date Posted:Sun, 07 Apr 2013 08:57:52 -0500
We show that the 2006 to 2009 housing collapse in the United States resulted in a very unequal distribution of wealth shocks due to geographic variation in ex-ante leverage and house price declines. We investigate the consumption consequences of these wealth shocks and show that the consumption risk-sharing hypothesis is easily rejected. We estimate an elasticity of consumption with respect to housing net worth of 0.6 to 0.8 and an average marginal propensity to consume (MPC) of 5 to 7 cents ...

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Fri, 05 Apr 2013 15:36:38 -0500
States without a judicial requirement for foreclosures are twice as likely to foreclose on delinquent homeowners. Comparing zip codes close to state borders with differing foreclosure laws, we show that foreclosure propensity and housing inventory jump discretely as one enters non-judicial states. There is no jump in other homeowner attributes such as credit scores, income, or education levels. The increase in foreclosure rates in non-judicial states persists for at least five years. Using the ...

REVISION: Dynamic Risk Management
Date Posted:Fri, 05 Apr 2013 15:23:59 -0500
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: Household Balance Sheets, Consumption, and the Economic Slump
Date Posted:Thu, 07 Mar 2013 13:29:10 -0600
We show that the 2006 to 2009 housing collapse in the United States resulted in a very unequal distribution of wealth shocks due to geographic variation in ex-ante leverage and house price declines. We investigate the consumption consequences of these wealth shocks and show that the consumption risk-sharing hypothesis is easily rejected. We estimate an elasticity of consumption with respect to housing net worth of 0.6 to 0.8 and an average marginal propensity to consume (MPC) of 5 to 7 cents ...

REVISION: Housing, Monetary Policy, and the Recovery
Date Posted:Thu, 06 Sep 2012 02:06:23 -0500
While the economy shows signs of strength, the recovery remains tepid relative to economic upswings following deep recessions of the past. This weakness has occurred despite an aggressive monetary response by the Federal Reserve which has adopted even unconventional tools to reduce long term interest rates. A variety of factors have been blamed for the tepid recovery, including the financial crisis of 2008, uncertainty over policy, and high levels of indebtedness. In this report, we focus on ...

REVISION: Dynamic Risk Management
Date Posted:Wed, 29 Aug 2012 11:38:43 -0500
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: What Explains High Unemployment? The Aggregate Demand Channel
Date Posted:Wed, 01 Aug 2012 04:49:58 -0500
A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand hypothesis for employment losses makes the joint prediction that job losses in the non-tradable sector will be higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector will be distributed uniformly across all counties. We find exactly ...

REVISION: Household Balance Sheets, Consumption, and the Economic Slump
Date Posted:Wed, 01 Aug 2012 01:02:53 -0500
We provide evidence that high levels of household debt in combination with the collapse in house prices was a primary factor in the onset and severity of consumption collapse from 2006 to 2009. Using novel county-level retail sales data, we show that the decline in household spending was much stronger in high leverage counties with large house price declines, and this decline was not offset by higher spending in low leverage counties. High leverage counties de-leveraged at a faster pace, ...

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Sat, 26 May 2012 09:59:29 -0500
States without a judicial requirement for foreclosures are twice as likely to foreclose on delinquent homeowners. Comparing zip codes close to state borders with differing foreclosure laws, we show that foreclosure propensity and housing inventory jump discretely as one enters non-judicial states. There is no jump in other homeowner attributes such as credit scores, income, or education levels. The increase in foreclosure rates in non-judicial states persists for at least five years. Using the ...

REVISION: Housing, Monetary Policy, and the Recovery
Date Posted:Fri, 11 May 2012 16:36:15 -0500
While the economy shows signs of strength, the recovery remains tepid relative to economic upswings following deep recessions of the past. This weakness has occurred despite an aggressive monetary response by the Federal Reserve which has adopted even unconventional tools to reduce long term interest rates. A variety of factors have been blamed for the tepid recovery, including the financial crisis of 2008, uncertainty over policy, and high levels of indebtedness. In this report, we focus on ...

REVISION: Dynamic Risk Management
Date Posted:Sun, 18 Mar 2012 07:55:08 -0500
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: Dynamic Risk Management
Date Posted:Mon, 12 Mar 2012 06:48:14 -0500
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge ...

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Fri, 23 Dec 2011 16:29:18 -0600
Foreclosures during the 2007 to 2009 recession had a large negative effect on house prices, residential investment, and durable consumption. Our empirical methodology uses state laws requiring a judicial foreclosure as an instrument for actual foreclosures, as well as focusing on zip codes very close to state borders with differing foreclosure laws. We show that the likely channel for the house price effect is a large foreclosure-induced increase in the supply of houses on the market. Our ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Wed, 14 Dec 2011 06:14:40 -0600
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Tue, 13 Dec 2011 17:24:23 -0600
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

REVISION: Household Balance Sheets, Consumption, and the Economic Slump
Date Posted:Fri, 18 Nov 2011 08:14:32 -0600
The large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. Using novel county level retail sales data, we show that the decline in consumption was much stronger in high leverage counties with large house price declines. Levered households experiencing larger house price declines faced larger drops in credit limits, were unable to ...

REVISION: What Explains High Unemployment? The Aggregate Demand Channel
Date Posted:Thu, 17 Nov 2011 15:29:18 -0600
A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009.

REVISION: Dynamic Risk Management
Date Posted:Wed, 12 Oct 2011 16:16:04 -0500
There is a trade-off between financing and risk management as both involve promises to pay which need to be collateralized. This trade-off explains that risk management is limited and often absent and that more financially constrained firms engage in less risk management. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time ...

REVISION: Dynamic Risk Management
Date Posted:Thu, 01 Sep 2011 18:53:19 -0500
There is a trade-off between financing and risk management as both involve promises to pay which need to be collateralized. This trade-off explains that risk management is limited and often absent and that more financially constrained firms engage in less risk management. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Tue, 12 Jul 2011 19:05:45 -0500
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

REVISION: Dynamic Risk Management
Date Posted:Fri, 01 Jul 2011 14:12:54 -0500
There is a trade-off between financing and risk management as both involve promises to pay which need to be collateralized. This trade-off explains that risk management is limited and often absent and that more financially constrained firms engage in less risk management. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time ...

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Fri, 20 May 2011 15:44:22 -0500
Foreclosures during the 2007 to 2009 recession had a large negative effect on house prices, residential investment, and durable consumption. Our empirical methodology uses state laws requiring a judicial foreclosure as an instrument for actual foreclosures, as well as focusing on zip codes very close to state borders with differing foreclosure laws. We show that the likely channel for the house price effect is a large foreclosure-induced increase in the supply of houses on the market. Our ...

REVISION: Foreclosures, House Prices, and the Real Economy
Date Posted:Thu, 09 Dec 2010 12:44:26 -0600
A central idea in macroeconomic theory is that negative price effects from the leverage-induced forced sale of durable goods can amplify negative shocks and reduce economic activity. We examine this idea by estimating the effect of U.S. foreclosures in 2008 and 2009 on house prices, residential investment, and durable consumption. We show that states that require judicial process for a foreclosure sale have significantly lower rates of foreclosures relative to states that have no such ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Mon, 29 Nov 2010 16:24:29 -0600
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Tue, 23 Nov 2010 17:09:57 -0600
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Sun, 21 Nov 2010 18:31:32 -0600
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in ...

New: The Effects of Fiscal Stimulus: Evidence from the 2009 ‘Cash for Clunkers’ Program
Date Posted:Sun, 05 Sep 2010 13:52:58 -0500
A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced ...

REVISION: Explaining Corporate Capital Structure: Product Markets, Leases, and Asset Similarity
Date Posted:Mon, 28 Jun 2010 15:04:06 -0500
Better measurement of the output produced and capital employed by firms substantially improves the ability to explain capital structure variation in the cross-section. For every firm, we construct the set of other firms producing the same output using the set of product market competitors listed in the firm’s public SEC filings. In addition, we improve measurement of capital structure by explicitly accounting for leased capital. These two steps increase the explanatory power of the average ...

New: The Great Recession: Lessons from Microeconomic Data
Date Posted:Thu, 17 Jun 2010 16:09:35 -0500
We highlight how a micro-level analysis of the Great Recession provides us with important clues to understand the origins of the crisis, the link between credit and asset prices, the feedback effect from asset prices to the real economy, and the role of household leverage in explaining the downturn. We hope that our discussion also serves as an example of the usefulness of incorporating microeconomic data and techniques in answering traditional macroeconomic questions.

REVISION: The Political Economy of the Subprime Mortgage Credit Expansion
Date Posted:Tue, 15 Jun 2010 09:50:48 -0500
We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers ...

REVISION: The Political Economy of the Subprime Mortgage Credit Expansion
Date Posted:Wed, 09 Jun 2010 16:00:42 -0500
We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers ...

REVISION: House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Date Posted:Fri, 21 May 2010 17:00:55 -0500
Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 cents for every dollar increase in ...

REVISION: Explaining Corporate Capital Structure: Product Markets, Leases, and Asset Similarity
Date Posted:Mon, 19 Apr 2010 15:41:07 -0500
Better measurement of the output produced and capital employed by firms substantially improves the ability to explain capital structure variation in the cross-section. For every firm, we construct the set of other firms producing the same output using the set of product market competitors listed in the firm’s public SEC filings. In addition, we improve measurement of capital structure by explicitly accounting for leased capital. These two steps increase the explanatory power of the average ...

REVISION: Capital Structure and Debt Structure
Date Posted:Thu, 18 Feb 2010 18:34:50 -0600
Using a novel data set that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. Relative to high credit quality firms, low credit quality firms are more likely to have a multi-tiered capital structure consisting of both secured bank debt with tight covenants and subordinated non-bank debt with loose covenants. We discuss the extent to which ...

REVISION: Capital Structure and Debt Structure
Date Posted:Sat, 19 Dec 2009 18:49:28 -0600
Using a novel data set that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. Relative to high credit quality firms, low credit quality firms are more likely to have a multi-tiered capital structure consisting of both secured bank debt with tight covenants and subordinated non-bank debt with loose covenants. We discuss the extent to which ...

REVISION: Household Leverage and the Recession of 2007 to 2009
Date Posted:Sun, 18 Oct 2009 19:06:38 -0500
We show that household leverage is an early and powerful predictor of the 2007 to 2009 recession. Counties in the U.S. that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006 – a full year before any significant change in unemployment. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis ...

REVISION: The Household Leverage-Driven Recession of 2007 to 2009
Date Posted:Sun, 04 Oct 2009 09:05:34 -0500
We present evidence that a primary culprit for the severe U.S. recession of 2007 to 2009 is the dramatic expansion in household leverage from 2002 to 2006. The aggregate evidence shows that house prices, mortgage default rates, fixed residential investment, and durable consumption were the first serious signs of weakness in the economy, and all four of these outcomes are closely linked to the preceding growth in leverage from 2002 to 2006. U.S. counties with large increases in debt to income ...

New: House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Date Posted:Thu, 01 Oct 2009 01:57:12 -0500
Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar ...

New: The Real Effects of Debt Certification: Evidence from the Introduction of Bank Loan Ratings
Date Posted:Thu, 24 Sep 2009 17:05:45 -0500
I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. The introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and also increases in firms' asset growth, cash acquisitions, and investment in working capital. Consistent with a causal effect of the ratings, the increase in debt usage and investment is ...

New: Bank Lines of Credit in Corporate Finance: An Empirical Analysis
Date Posted:Wed, 23 Sep 2009 17:04:33 -0500
I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. I find that bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. In contrast, firms with low cash flow are less likely to obtain a line of credit, and they rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use ...

REVISION: The Household Leverage-Driven Recession of 2007 to 2009
Date Posted:Wed, 09 Sep 2009 11:22:17 -0500
The primary driver of the severe U.S. recession of 2007 to 2009 is the dramatic expansion in household leverage from 2002 to 2006. The aggregate evidence shows that house prices, mortgage default rates, fixed residential investment, and durable consumption were the first serious signs of weakness in the economy, and all four of these economic variables are closely linked to the preceding growth in leverage from 2002 to 2006. A cross-sectional analysis of U.S. counties shows that areas with ...

REVISION: The Household Leverage-Driven Recession of 2007 to 2009
Date Posted:Mon, 31 Aug 2009 11:53:55 -0500
The primary cause of the severe U.S. recession of 2007 to 2009 is the dramatic expansion in household leverage from 2002 to 2006. The aggregate evidence shows that house prices, mortgage default rates, fixed residential investment, and durable consumption were the first serious signs of weakness in the economy, and all four of these economic variables are closely linked to the preceding growth in leverage from 2002 to 2006. A cross-sectional analysis of U.S. counties shows that areas with ...

REVISION: The Household Leverage-Driven Recession of 2007 to 2009
Date Posted:Fri, 28 Aug 2009 18:06:18 -0500
The primary cause of the severe U.S. recession of 2007 to 2009 was the dramatic expansion in household leverage from 2002 to 2006. The aggregate evidence shows that house prices, mortgage default rates, fixed residential investment, and durable consumption were the first serious signs of weakness in the economy, and all four of these economic variables are closely linked to the preceding growth in leverage from 2002 to 2006. A cross-sectional analysis of U.S. counties shows that areas with ...

Update: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Mon, 17 Aug 2009 06:44:08 -0500
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a reduction in debt usage and shareholder payouts. The changes
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REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Mon, 17 Aug 2009 05:19:50 -0500
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a reduction in debt usage and shareholder payouts. The ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Fri, 31 Jul 2009 04:06:49 -0500
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a reduction in debt usage and shareholder payouts. The ...

REVISION: Creditor Control Rights, Corporate Governance, and Firm Value
Date Posted:Sun, 26 Jul 2009 17:29:19 -0500
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a reduction in debt usage and shareholder payouts. The ...

REVISION: House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Date Posted:Mon, 06 Jul 2009 09:58:17 -0500
Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar ...

REVISION: The Political Economy of the U.S. Mortgage Default Crisis
Date Posted:Tue, 02 Jun 2009 16:27:33 -0500
We examine the effects of constituent interests, special interests, and politician ideology on congressional voting behavior on two of the most significant pieces of legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. Representatives from districts experiencing an increase in mortgage default rates are more likely to vote in favor of the AHRFPA, and the response is stronger in more ...

REVISION: House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Date Posted:Tue, 02 Jun 2009 16:01:20 -0500
Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar ...

REVISION: House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis
Date Posted:Fri, 01 May 2009 06:46:05 -0500
Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar ...

New: Financial Contracting: A Survey of Empirical Research and Future Directions
Date Posted:Wed, 11 Mar 2009 22:23:59 -0500
We review recent evidence and future directions for empirical research on financial contracting in the context of corporate finance. Specifically, we survey evidence pertaining to incentive conflicts, control rights, collateral, renegotiation, and interactions between financial contracts and other governance mechanisms. We also discuss directions for future research, concluding that the financial contracting approach offers a potentially fruitful perspective for empirical researchers seeking ...

REVISION: The Value Implications of Creditor Intervention
Date Posted:Mon, 16 Feb 2009 09:09:59 -0600
We use violations of financial covenants in private credit agreements as indicators of increased creditor intervention and explore changes in stock prices and operating performance following the violation. We find that firms violating a loan covenant experience positive abnormal stock price performance in the months following the violation. Measured in either calendar time or event time, covenant violators earn abnormal returns on the order of 10 to 12% per year beginning within a month of ...

REVISION: Capital Structure and Debt Structure
Date Posted:Sun, 15 Feb 2009 20:01:28 -0600
Using a novel data set that records individual debt issues on the balance sheet of a large sample of rated public firms, we show that recognition of debt heterogeneity leads to new insights into the determinants of corporate capital structure. We first demonstrate that traditional capital structure studies that ignore debt heterogeneity miss a substantial fraction of capital structure variation. We then show that relative to high credit quality firms, low credit quality firms are more likely ...

REVISION: The Political Economy of the U.S. Mortgage Default Crisis
Date Posted:Sat, 10 Jan 2009 18:05:55 -0600
We examine the effects of constituent interests, special interests, and politician ideology on congressional voting behavior on two of the most significant pieces of legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. Representatives from districts experiencing an increase in mortgage default rates are more likely to vote in favor of the AHRFPA, and the response is stronger in more ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis
Date Posted:Mon, 29 Dec 2008 19:47:52 -0600
We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes, or zip codes with a disproportionately large share of subprime borrowers as of 1996. Prior to the default crisis, these subprime zip codes experience an unprecedented relative growth in mortgage credit. The expansion in ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the Mortgage Default Crisis
Date Posted:Thu, 27 Nov 2008 04:35:45 -0600
We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes that experience an unprecedented relative growth in mortgage credit from 2002 to 2005. This expansion in mortgage credit to subprime zip codes occurs despite sharply declining relative (and in some cases absolute) income ...

REVISION: The Political Economy of the U.S. Mortgage Default Crisis
Date Posted:Sun, 23 Nov 2008 17:07:37 -0600
We examine the determinants of congressional voting behavior on two of the most significant pieces of federal legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. We find evidence that constituent interests and special interests influence voting patterns during the crisis. Representatives from districts experiencing an increase in mortgage default rates are significantly more likely to ...

New: The Political Economy of the U.S. Mortgage Default Crisis
Date Posted:Thu, 20 Nov 2008 23:41:42 -0600
We examine the determinants of congressional voting behavior on two of the most significant pieces of federal legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. We find evidence that constituent interests and special interests influence voting patterns during the crisis. Representatives from districts experiencing an increase in mortgage default rates are significantly more likely to ...

New: Capital Structure and Debt Structure
Date Posted:Tue, 18 Nov 2008 02:34:02 -0600
Using a novel data set that records individual debt issues on the balance sheet of a large random sample of rated public firms, we show that a recognition of debt heterogeneity leads to new insights into the determinants of corporate capital structure. We first demonstrate that traditional capital structure studies that ignore debt heterogeneity miss a substantial fraction of capital structure variation. We then show that relative to high credit quality firms, low credit quality firms are more ...

REVISION: Capital Structure and Debt Structure
Date Posted:Mon, 10 Nov 2008 11:36:39 -0600
Using a novel data set that records individual debt issues on the balance sheet of a large random sample of rated public firms, we show that a recognition of debt heterogeneity leads to new insights into the determinants of corporate capital structure. We first demonstrate that traditional capital structure studies that ignore debt heterogeneity miss a substantial fraction of capital structure variation. We then show that relative to high credit quality firms, low credit quality firms are more ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Date Posted:Thu, 06 Nov 2008 10:39:41 -0600
We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes that experience an unprecedented relative growth in mortgage credit from 2002 to 2005. This expansion in mortgage credit to subprime zip codes occurs despite sharply declining relative (and in some cases absolute) income ...

REVISION: The Political Economy of the U.S. Mortgage Default Crisis
Date Posted:Tue, 04 Nov 2008 18:29:43 -0600
We examine the determinants of congressional voting behavior on two of the most significant pieces of federal legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. We find evidence that constituent interests and special interests influence voting patterns during the crisis. Representatives from districts experiencing an increase in mortgage default rates are significantly more likely to ...

REVISION: Renegotiation of Financial Contracts: Evidence from Private Credit Agreements
Date Posted:Wed, 20 Aug 2008 08:31:58 -0500
Using a large sample of private credit agreements between US publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. Our analysis of the determinants of renegotiation reveal that the accrual of new ...

REVISION: Control Rights and Capital Structure: An Empirical Investigation
Date Posted:Wed, 20 Aug 2008 08:24:20 -0500
We show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy. Net debt issuing activity experiences a sharp and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit. The effect of creditor actions on debt policy is strongest when the borrower's alternative sources of finance are costly. In addition, despite the less ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Date Posted:Sat, 14 Jun 2008 20:47:17 -0500
We show that an expansion in the supply of mortgage credit to high latent demand zip codes led to the rapid increase in house prices from 2001 to 2005 and subsequent defaults from 2005 to 2007. From 2001 to 2005, high latent (unfulfilled) demand zip codes experience relative declines in denial rates and interest rates and relative increases in mortgage credit and house prices, despite the fact that these zip codes experience negative relative income and employment growth. The growth in ...

REVISION: Creditor Control Rights and Firm Investment Policy
Date Posted:Sun, 25 May 2008 17:21:20 -0500
We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at ...

REVISION: Renegotiation of Financial Contracts: Evidence from Private Credit Agreements
Date Posted:Thu, 22 May 2008 18:00:12 -0500
Using a large sample of private credit agreements between US publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. Our analysis of the determinants of renegotiation reveal that the accrual of new ...

New: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Date Posted:Sun, 04 May 2008 23:59:05 -0500
We demonstrate that a rapid expansion in the supply of mortgages driven by disintermediation explains a large fraction of recent U.S. house price appreciation and subsequent mortgage defaults. We identify the effect of shifts in the supply of mortgage credit by exploiting within-county variation across zip codes that differed in latent demand for mortgages in the mid 1990s. From 2001 to 2005, high latent demand zip codes experienced large relative decreases in denial rates, increases in ...

REVISION: The Composition and Priority of Corporate Debt: Evidence from Fallen Angels
Date Posted:Wed, 19 Mar 2008 13:01:04 -0500
We examine the composition and priority structure of corporate debt for firms downgraded from investment grade to speculative grade. Our findings demonstrate the importance of recognizing debt heterogeneity in capital structure studies, and they support theoretical models in which debt structure is set to encourage bank monitoring. Firms experience dramatic changes in debt structure after a downgrade, despite maintaining similar leverage ratios. Post-downgrade, there is a sharp reduction in ...

REVISION: The Composition and Priority of Corporate Debt: Evidence from Fallen Angels
Date Posted:Tue, 26 Feb 2008 10:17:54 -0600
We examine the composition and priority structure of corporate debt for firms downgraded from investment grade to speculative grade. Our findings demonstrate the importance of recognizing debt heterogeneity in capital structure studies, and they support theoretical models in which debt structure is set to encourage bank monitoring. Firms experience dramatic changes in debt structure after a downgrade, despite maintaining similar leverage ratios. Post-downgrade, there is a sharp reduction in ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Date Posted:Sun, 10 Feb 2008 19:07:28 -0600
We demonstrate that a rapid expansion in the supply of mortgages driven by disintermediation explains a large fraction of recent U.S. house price appreciation and subsequent mortgage defaults. We identify the effect of shifts in the supply of mortgage credit by exploiting within-county variation across zip codes that differed in latent demand for mortgages in the mid 1990s. From 2001 to 2005, high latent demand zip codes experienced large relative decreases in denial rates, increases in ...

REVISION: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Date Posted:Mon, 17 Dec 2007 00:02:27 -0600
We demonstrate that a rapid expansion in the supply of mortgage loans driven by disintermediation is a main culprit for the sharp rise in U.S. mortgage defaults. We identify shifts in the supply of mortgage credit by exploiting within county variation across zip codes that differed in latent demand for mortgages in the mid 1990s. We show that expansion in mortgage supply from 2001 to 2005 led to sharp relative increases in loan originations and home prices in zip codes with high latent demand, ...

REVISION: Control Rights and Capital Structure: An Empirical Investigation
Date Posted:Thu, 15 Nov 2007 19:23:24 -0600
We show that incentive conflicts between firms and their creditors have a larger impact on corporate capital structure than traditional determinants (e.g., size, profitability, asset tangibility, market-to-book, etc.). Using a regression discontinuity design, we find that corporate net debt issuing activity experiences a large and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to moderate the supply of credit via increases in ...

REVISION: Contingency and Renegotiation of Financial Contracts: Evidence from Private Credit Agreements
Date Posted:Fri, 28 Sep 2007 05:28:25 -0500
Using a large random sample of private credit agreements between US publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity, despite being designed with a number of contingencies that tie the contract terms to future verifiable events. Renegotiations result in material changes to the terms of the contract, and lead to an average effective maturity that is half of the average stated maturity. Our ...

REVISION: Control Rights and Capital Structure: An Empirical Investigation
Date Posted:Sun, 03 Jun 2007 08:54:36 -0500
We show that creditors use the rights obtained after financial covenant violations to exert control over a large number of financing decisions of solvent firms. After showing that financial covenant violations occur among almost one third of all publicly listed firms, we find that creditors use the threat of accelerating the loan to reduce net debt issuing activity by over 2% of assets per annum immediately following a covenant violation - an effect that is significantly larger than the effect ...

REVISION: Control Rights and Capital Structure: an Empirical Investigation
Date Posted:Mon, 26 Mar 2007 14:26:01 -0500
We show that a large number of significant financing decisions of solvent firms are dictated by creditors, who use the transfer of control accompanying financial covenant violations to address the misalignment of incentives between managers and investors. After showing that financial covenant violations occur among almost one third of all publicly listed firms, we find that creditors use the threat of accelerating the loan to reduce net debt issuing activity by over 2% of assets per annum ...

REVISION: Creditor Control Rights and Firm Investment Policy
Date Posted:Mon, 05 Mar 2007 11:32:48 -0600
We provide novel empirical evidence of a direct contracting channel through which firm financial policy affects firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a restriction following negative borrower performance. Moreover, the effect of credit downgrades and financial covenant violations on ...

REVISION: Control Rights and Capital Structure: An Empirical Investigation
Date Posted:Tue, 27 Feb 2007 06:23:12 -0600
We show that a large number of significant financing decisions of solvent firms are dictated by creditors, who use the transfer of control accompanying financial covenant violations to address the misalignment of incentives between managers and investors. After showing that financial covenant violations occur among almost one third of all publicly listed firms, we find that creditors use the threat of accelerating the loan to reduce net debt issuing activity by over 2% of assets per annum ...

REVISION: Creditor Control Rights and Firm Investment Policy
Date Posted:Sun, 19 Nov 2006 18:02:00 -0600
We provide novel empirical evidence of a direct contracting channel through which firm financial policy affects firm investment policy. We examine a large sample of private credit agreements between banks and publicly traded U.S. corporations and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a restriction following negative borrower performance, and the effect of negative performance on the likelihood ...

REVISION: The Real Effects of Debt Certification: Evidence from the Introduction of Bank Loan Ratings
Date Posted:Thu, 05 Oct 2006 17:35:00 -0500
I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. I find that the introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and in increases in firms' asset growth, cash acquisitions, and investment in working capital. A loan level analysis demonstrates that borrowers that obtain a loan rating gain ...

REVISION: Creditor Control Rights and Firm Investment Policy
Date Posted:Fri, 08 Sep 2006 09:53:46 -0500
We provide empirical support for control-based theories of financial contracting by documenting creditors' widespread use of explicit contractual restrictions on firm investment policy. We examine a large sample of private credit agreements between banks and publicly traded corporations, and we find that creditors impose a capital expenditure restriction on 40% of loans. Creditors are more likely to impose a restriction after negative firm performance, and the effect of negative performance on ...

REVISION: Creditor Control Rights and Firm Investment Policy
Date Posted:Fri, 08 Sep 2006 04:49:34 -0500
We provide empirical support for control-based theories of financial contracting by documenting creditors' widespread use of explicit contractual restrictions on firm investment policy. We examine a large sample of private credit agreements for publicly traded corporations, and we find that creditors impose a capital expenditure restriction on 40% of loans. Creditors are more likely to impose a restriction after negative firm performance, and the effect of negative performance on the ...

REVISION: Bank Lines of Credit in Corporate Finance: An Empirical Analysis
Date Posted:Wed, 28 Jun 2006 08:41:34 -0500
I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. Bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. Firms with low cash flow are less likely to obtain a line of credit, and rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based ...

REVISION: The Real Effects of Debt Certification: Evidence from the Introduction of Bank Loan Ratings
Date Posted:Wed, 05 Apr 2006 10:25:05 -0500
I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. I find that the introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and in increases in firms' asset growth and cash acquisitions. A loan level analysis demonstrates that borrowers that obtain a loan rating gain increased access to the capital of ...

REVISION: Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans
Date Posted:Mon, 27 Mar 2006 08:47:46 -0600
I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, ...

REVISION: Bank Lines of Credit in Corporate Finance: An Empirical Analysis
Date Posted:Thu, 23 Mar 2006 07:23:50 -0600
I use novel data collected from annual 10-K SEC filings to examine the role of bank lines of credit in the liquidity management of public corporations. I find that bank lines of credit account for a large share of liquidity only for firms with a historical record of profitability. Firms with low profitability that are unable to obtain a line of credit more heavily use cash in their corporate liquidity management; they hold higher balances of cash and save more cash out of cash flow than ...

REVISION: Certification and Borrower Outcomes: Evidence from the Introduction of Bank Loan Ratings
Date Posted:Fri, 03 Feb 2006 09:24:33 -0600
I exploit the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to examine (a) which firms value certification by a third-party ratings agency, and (b) the effects of certification on financial and real outcomes of borrowers. I find evidence that larger and younger borrowers are more likely to obtain bank loan ratings, but only if they do not have a credit rating before 1995. I also find that the introduction of bank loan ratings leads to increases in the ...

REVISION: Banks and Flexibility: Empirical Evidence on the Mix of Equity, Bonds, and Bank Debt
Date Posted:Mon, 16 May 2005 08:44:27 -0500
I use novel data collected from annual 10-K SEC filings for a sample of public firms from 1996 to 2003; the data record the existence of used and unused bank lines of credit and detail the debt structure of firms. Using these data, I examine the mix of equity, arm's length debt, and bank debt. Contrary to hypotheses developed in theoretical research, I find a positive relationship between firm quality and the use of bank debt, where firm quality is measured using the lagged earnings to ...

Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance
Date Posted:Thu, 03 Feb 2005 22:06:22 -0600
We examine whether unregulated, private insurance markets efficiently provide insurance against reclassification risk (the risk of becoming a bad risk and facing higher premiums). To do so, we examine the ex-post risk type of individuals who drop their long-term care insurance contracts relative to those who are continually insured. Consistent with dynamic inefficiencies, we find that individuals who drop coverage are of lower risk ex-post than individuals who were otherwise-equivalent at the ...

Does Joint Production of Lending and Underwriting Help or Hurt Firms? A Fixed Effects Approach
Date Posted:Sun, 28 Nov 2004 22:42:44 -0600
The relaxation of restrictions on commercial bank underwriting, culminated in the passage of the Financial Services Modernization Act of 1999, has initiated a major change in debt underwriting markets facing borrowing firms, as financial institutions are now able to jointly produce private lending and corporate debt underwriting services. Using fixed effects regressions on a panel of 4553 debt issues by 509 firms from 1990 to 2003, I find that issuing firms receive a 10 to 15 percent reduction ...

The Changing Landscape of the Financial Services Industry: What Lies Ahead?
Date Posted:Fri, 03 Sep 2004 10:37:43 -0500
This paper examines the consequences of the Financial Services Modernization Act of 1999 for the structure of the U.S. financial services industry. We ask how the industry may evolve as this new legislation interacts with the consolidation trend already under way, what types of mergers are most likely to occur, and how profitable and risky the resulting firms might be.

Who Goes to College? Differential Enrollment by Race and Family Background
Date Posted:Tue, 12 Nov 2002 12:46:53 -0600
While trends in college enrollment for blacks and whites have been the subject of study for a number of years, little attention has been paid to the variation in college enrollment by socioeconomic status (SES). It is well documented that, controlling for family background, blacks are more likely to enroll in college than whites. This relationship is somewhat deceptive, however. Upon closer examination, we find that blacks are more likely to enroll in college than their white counterparts only ...