What's New?

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)

Working Papers

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

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, 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) NEW December 2014

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.

The Unintended Consequences of the Zero Lower Bound Policy NEW

Revision Requested by Journal of Financial Economics

(with Marcin Kacperczyk) February 2015

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: 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.

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 2014, 2014 Annual Meeting of the Financial Management Association, 9th Csef-Igier Symposium on Economics and Institutions.

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), NEW VERSION August 2014

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

Financial Intermediation Networks

(with Alireza Tahbaz-Salehi)

We study a dynamic model of financial intermediation in which interbank lending is subject to moral hazard, where intermediaries can divert funds towards inefficient projects. We show that despite the presence of moral hazard, secured lending contracts can discipline the investment choices of all market participants — even those with whom they are not directly contracting — thus partially overcoming market frictions. Our results provide a characterization of the relationship between the intermediation capacity of the system on the one hand, and the extent of moral hazard, the distribution of collateral and the network of interbank relationships on the other. We use this characterization to show that due to the recursive nature of the moral hazard problem, small changes in fundamentals may result in significant drops in the financial system’s intermediation capacity, leading to a complete credit freeze.