Working Papers

Macroeconomic effects of household leverage regulations after the crisis
Job market paper

This paper assesses the aggregate and distributional effects of policies that seek to reduce mortgage default by limiting a borrower’s debt payment-to-income ratio. I document empirically that highly creditworthy borrowers appear constrained by a current institutional debt payment-to-income limit. I propose a heterogeneous-agent life-cycle model with a competitive mortgage market, endogenous default, and mortgage contract choice consistent with the empirical findings. In the calibrated model, I show that, relative to the current uniformly applied debt payment-to-income cap, a policy that combines a more strict debt payment-to-income limit with a costly option to relax the limit lowers default and improves aggregate welfare, particularly for households in the middle of the wealth distribution who have low incomes.

Sovereign Debt Composition in Advanced Economics: A Historical Perspective [SSRN, VoxEU]
with S. M. Ali Abbas, Laura Blattner, Mark De Broeck, and Asmaa El-Ganainy
IMF Working Paper WP/14/162

We examine how the composition of public debt, broken down by currency, maturity, holder profile and marketability, has responded to major debt accumulation and consolidation episodes during 1900-2011. Covering thirteen advanced economies, we focus on debt structure shifts that occurred around the two World Wars and global economic downturns, and the subsequent debt consolidations. Notwithstanding data gaps, we are able to recover some broad common patterns. Episodes of large debt accumulation—essentially, large increases in debt supply—were typically absorbed by increases in short-term, foreign currency-denominated, and banking-system-held debt. However, this pattern did not hold during the debt build-ups starting in the 1980s and 1990s, which were compositionally skewed toward long-term local-currency debt. We attribute this change to higher structural demand for sovereign paper, linked to capital account liberalization in advanced economies, the emergence of a large contractual saving sector, and innovative sovereign debt products. With regard to debt consolidations, we find support for the financial repression-cum-inflation channel for post World War II debt reductions. However, the scope for a repeat of this strategy appears limited unless financial liberalization and globalization were materially rolled back or the current globally agreed monetary policy regime built around price stability abandoned. Neither are significant favorable structural demand shifts, as witnessed in the 1980s and 1990s, likely.

Works in Progress

The consumption insurance role of homeownership

I establish a set of stylized facts regarding the consumption insurance role of homeownership. Using the Panel Study of Income Dynamics, I first show that the decline in nondurable consumption among owners during periods of low earnings is less than one-third the size of the consumption decrease of renters under equivalent circumstances. Next, I demonstrate that increased borrowing collateralized by the primary residence, or equity extraction, can account for the aforementioned consumption response of owners. Conditioning on an owner’s initial stock of liquid savings is crucial: the consumption responses of equity extractors and non-extractors among the subset of owners with relatively high levels of liquid assets do not exhibit any significant difference. These findings suggest that the self-insurance role of homeownership is more salient for liquidity constrained owners.