What's New?

New Working Paper with Amir Kermani and Christopher Palmer on Unconventional Monetary Policy.

NBER Household Finance Grant Award (Sloan Foundation) for the project

Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging (with Amir Kermani)

INQUIRE Europe Research Grant for the project

The Unintended Consequences of the Zero-Bound Monetary Policy: Evidence from Money Funds (with Marcin Kacperczyk)


Forthcoming on the Journal of Financial Economics

(with Marcin Kacperczyk)

We study the impact of the zero lower bound interest rate policy on the U.S. money fund industry. We find that in response to policies that maintain zero interest rates, money funds: invest in riskier asset classes; hold less diversified portfolios; are more likely to exit the market; and reduce the fees they charge their investors. Further, funds affiliated with large financial institutions are more likely to exit the market while funds managed by independent asset management companies take on relatively more risk—thus inducing a negative selection of risky funds in the market. Finally, fund families closing their money funds are more likely to open new funds, especially those invested in bonds.

Presented at: AFA 2016, EFA, London Business School, Imperial College of London, the Aalto University, BI Oslo, Exeter University, London School of Economics, National Bank of Poland, HKUST, Singapore Management University, National University of Singapore and University of Hong Kong.

Working Papers

Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging(with Amir Kermani and Rodney Ramcharan)

Revision Requested by The American Economic Review

Supplementary Appendix

NEW February 2015

Do households benefit from expansionary monetary policy? We investigate how indebted households' consumption and saving decisions are affected by anticipated changes in monthly interest payments. We focus on borrowers with adjustable rate mortgages originated between 2005 and 2007 featuring an automatic reset of the interest rate after five years. The monthly payment due from the average borrower falls by 52 percent ($900) upon reset, resulting in an increase in disposable income totaling tens of thousands of dollars over the remaining life of the mortgage. We uncover three patterns. First, the average household increases monthly car purchases by 40 percent ($150) upon reset. Second, this expansionary effect is attenuated by the borrowers' voluntary deleveraging, as a significant fraction of the increased income is deployed to accelerate debt repayment. Third, the marginal propensity to consume is significantly higher for low income and underwater borrowers. To complement these household-level findings, we employ county-level data to provide evidence that consumption responded more to a reduction in short-term interest rates in counties with a larger fraction of adjustable rate mortgage debt. Our results shed light on the income channel of monetary policy as well as the role of debt rigidity in reducing the effectiveness of monetary policy.

Presented at: the NBER Monetary Economics Fall meeting, Harvard University, Cornell University, University of Toronto, Jackson Hole Finance Conference, UBC Winter Finance Conference, Adam Smith Corporate Finance Conference 2015, UNC/Duke Corporate Finance Conference, UC Berkeley, UCSC, Society of Economics Dynamics 2015 meeting, EIEF, Federico II University of Naples, the New York Fed-NYU conference on "Mortgage Contract Design: Implications for Households, Monetary Policy, and Financial Stability", 8th Swiss Winter conference on Financial Intermediation, Fed “Day Ahead” Conference on Financial Markets and Institutions.

Credit-Induced Boom and Bust (with Amir Kermani)

Revision Requested by The Review of Financial Studies

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties in 2003 and that in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation produced an 13% increase in annual lending. Our estimates show that to this lending increase is associated with a 12% rise in house prices and a 2% expansion of employment in the non-tradable sectors, followed by drops of similar magnitude in subsequent years. Finally, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. These effects are even stronger for subprime and inelastic regions.

Presented at: the 2014 NBER Summer Institute Monetary Economics and Real Estate meetings, the 16th Annual Texas Finance Festival, Tel Aviv Finance Conference, the 10th CSEF-IGIER Symposium on Economics and Institutions, the 2014 Summer Real Estate Symposium, the SF Fed-UCLA conference on Housing and Monetary Policy, the Columbia-NYU Finance meeting, the Joint Central Bank Conference on Monetary Policy and Financial Stability at Bank of Canada, New York Fed, Cornell University, Columbia University and UC Berkeley.

Collateral Shortages and Intermediation Networks

(with Alireza Tahbaz-Salehi)

Revision Requested by The Review of Financial Studies

This paper argues that in the presence of trading frictions and agency problems, the interbank market may be overly fragile, in the sense that small changes in the liquidity of assets used as collateral may lead to large swings in haircuts and a potential credit freeze. Our results highlight that the financial system's intermediation capacity crucially depends on the distribution of collateralizable assets among financial institution as opposed to their aggregate amount. We also show that the interplay of agency problems and trade frictions may result in the endogenous emergence of intermediation bottlenecks that impair credit relationships. These results thus provide a novel explanation for the collapse in the secured lending market during the recent crisis.

Presented at: Princeton, Stanford, Wharton Liquidity Conference, Philadelphia Fed, CMU Tepper School of Business and Adam Smith Workshop on Asset Pricing at LSE, AFA 2016.

Unconventional Monetary Policy and the Allocation of Credit

(with Amir Kermani and Christopher Palmer)

Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how the composition of purchased assets matters. Using rich mortgage-market data, we document that there is a "flypaper effect" of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the nature of the assets purchased. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-guaranteed mortgage originations significantly more than the origination of non-GSE mortgages. In contrast, QE2's focus on purchasing Treasuries did not have such differential effects. Moreover, we find that most bank proceeds from LSAPs remained in Excess Reserves with the Fed, with little evidence supporting the bank-lending channel transmission mechanism of LSAPs. The targeted nature of the Fed's RMBS purchasing program thus de facto allocated credit across mortgage market segments and more broadly across fixed-income markets. This led to an unintended consequence of the program: many borrowers delevered to take advantage of QE-induced low interest rates by refinancing existing mortgages into GSE-eligible loans that were below local Conforming Loan Limits and below 80% LTV. Finally, we show that HARP significantly alleviated this behavior, suggesting that complementary interventions enhanced the strength of Quantitative Easing on the real economy.

Presented at: New York University (Stern), University of Minnesota (Carlson), University of Illinois Urbana-Champaign, San Francisco Fed, Catholic University of Milan, Columbia Business School, UC Berkeley.

The Importance of Unemployment Insurance as an Automatic Stabilizer

(with Amir Kermani)

We assess the extent to which unemployment insurance (UI) mitigates the economy's sensitivity to shocks by working as an automatic stabilizer. Using a local labor market design based on heterogeneity in local benefit generosity (defined as the percentage of household income recovered by the unemployment benefit), we estimate that a one standard deviation increase in generosity attenuates the effect of adverse shocks on employment growth by 12% and on earnings growth by 18%. Consistent with the hypothesis that this effect derives from the local demand channel, we find that consumption is less responsive to local labor demand shocks in counties with more generous UI. Moreover, the average wage growth of employed workers is less elastic to local labor shocks when benefits are more generous. Our analysis finds that the local fiscal multiplier of UI expenditure is approximately 1.2-1.8. Overall, our results suggest that UI has a beneficial effect on the economy by decreasing its sensitivity to shocks.

Presented at: the 2015 NBER Summer Institute Monetary Economics, Berkeley Econ, Columbia Econ, NBER Public Economics Fall Meeting.

Deregulation, Competition and the Race to the Bottom

(with Amir Kermani and Sanket Korgaonkar)

We exploit the OCC's preemption of national banks from state laws against predatory lending as a quasi-experiment to study the effect of deregulation and its interaction with competition on the supply of complex mortgages (interest-only, negative amortization, and teaser mortgages). Following the preemption ruling, national banks significantly increased their origination of loans with prepayment penalties and negative amortization features by comparison with lenders not regulated by OCC and lenders in states without predatory lending laws. Further, we highlight a competition channel: in counties where OCC-regulated lenders had larger market shares prior to the preemption, even non-OCC lenders responded by increasing their use of these riskier terms to the extent permitted by the state predatory-lending laws. Overall, our evidence suggests that the deregulation of credit markets triggered a "race to the bottom" among distressed financial institutions, working through competition between lenders.

Presented at: the 2015 NBER Corporate Finance and Household Finance Summer Institute, Kellogg School of Management, Olin Business School, AFA 2016*.


This paper presents a model in which the investment funds' desire to enhance their reputation is decisive in determining the severity of aggregate shocks. Fund managers can generate active returns at a disutility or try to time the market, while investors learn about the managers' skill by observing past returns. During booms, star funds exploit their status by extracting higher rents from investors, while poor performers may end up in a reputation trap, limiting their ability to attract investment. In a crisis, the funds exploit their reputation more frequently and tend to exacerbate fluctuations insofar as in the search for higher short-term returns they expose investors' capital to tail risk. The model's predictions on the effect of volatility, skewness of returns and inflows of funds, are all supported by recent empirical evidence on fund managers' behavior.

Presented at: 3rd ITAM Finance Conference, Financial Intermediation Research Society 2015, 2014 Annual Meeting of the Financial Management Association, 9th Csef-Igier Symposium on Economics and Institutions.

Market Turmoil and Destabilizing Speculation

This paper explores how speculators can destabilize financial markets by amplifying negative shocks in periods of market turmoil. I propose a dynamic trading model with two types of investors -- long-term and speculative -- who interact in a market with search frictions. During periods of turmoil created by an uncertainty shock, speculators react to declining asset prices by liquidating their holdings in hopes of buying them back later at a gain, despite the asset's cash flows remaining the same throughout. Interestingly, I show that a reduction in search frictions leads to more severe fluctuations in asset prices. At the root of this result are the strategic complementarities between speculators expected to follow similar strategies in the future.

Presented at: the 2014 Adam Smith Workshop in Asset Pricing at LBS, the American Finance Association meeting (AP) 2014, MIT, Columbia GSB, Stanford GSB, University of Chicago (Booth), Berkeley (Haas), HBS, Northwestern (Kellogg), Ohio State (Fisher College), NYU (Stern), Duke (Fuqua), UNC (Kenan-Flagler), BC (Carroll), New York Fed, Fed Board, Philly Fed, Collegio Carlo Alberto, EIEF, the European Finance Association meeting 2013, the Sixth Erasmus Liquidity conference.

"Financial Disclosure and Market Transparency with Costly Information Processing" (with Marco Pagano)

We study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. As a consequence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient.

Presented at: EFA meeting, the 2013 SFS Finance Cavalcade, the 2013 FIRS meeting, the CREI-CEPR workshop on "Behavioral Decision Theory and its Applications to Economics and Finance", the 2013 CSEF-IGIER Symposium on Economics and Institutions, the XIV Madrid Finance Workshop, the Econometric Society Meeting in Philadelphia 2014, the Barcelona GSE Summer Forum 2014 on Information and Market Frictions, the 2014 European Summer Symposium in Financial Markets, MIT (Sloan), Catholic University (Milan) and Science Po (Paris)

Revision requested by Management Science

What drives workers to seek information from their peers? And how does communication affect employee performance? We address these questions using an original panel data set that includes all accesses to an information-sharing platform, together with performance measures of all loan officers at a major commercial bank. This paper makes three contributions. First, we show that skill level differences, job rotation, and differences among branches each affect the demand for information. Moreover, low skill agents benefit the most from consuming others' information. Second, restricting attention to officers who switched branches, we show that they perform on average significantly worse than before the switch, suggesting that job rotation destroys specialized human capital, such as soft information about local borrowers. Third, by instrumenting the demand for information with the exogenous variation arising from differences in social norms among branches, we are able to assess the causal effect of information sharing on performance: a standard deviation increase in information access increases performance by roughly ten percent.

Work in Progress

The Value of Trading Relationships in Turbulent Times

(with Amir Kermani and Zhaogang Song)

This paper investigates how the network of relationships between dealers shapes their trading behavior in the corporate bond market. We show that dealers tend to provide liquidity during periods of distress to the counterparties with whom they have the strongest tie. However, highly connected and systemically important dealers exploit their connections at the expense of peripheral dealers as well as of their clients, charging them higher prices than to other core dealers, especially during high-uncertainty periods. We then exploit the flagship collapse of a large dealer in 2008 as a shock to the network of relationships among dealers. We show that institutions with stronger ties to this dealer are forced to route their trades through longer intermediation chains to contact new counterparties, which charge them significantly higher prices. Moreover, we provide evidence suggesting that dealers did not lean against the wind; in contrast they drastically reduced their inventory. These results inform the debate on the risks related to the interconnectedness of the financial system by showing how it might be a source of market fragility and illiquidity.

Presented at: The New York Fed Financial Intermediation Conference. LSE conference on Economic Networks and Finance.

The Real Effects of HARP (with Amir Kermani and Gene Amromin)