Macroeconomics & International Finance Seminars

Spring 2019

Tuesday 1:40–3:00 p.m.
499 Engineering II

April 16
Laura Blatnner, Stanford GSB
"When Losses Turn Into Loans: The Cost of Undercapitalized Banks"
Host: Brenda Samaniego de la Parra / Alonso Villacorta
We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the effects of reduced capital adequacy on productivity. Affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. We show that the credit reallocation leads to a reallocation of production factors across firms. We find that the resulting factor misallocation accounts for 24% of the decline in productivity in Portugal in 2012.

April 23
Adriano Rampini, Duke University
"Financing Insurance"
Host: Alonso Villacorta
Insurance has an intertemporal aspect as insurance premia have to be paid upfront.  We argue that the financing aspect of insurance is key to understanding basic insurance patterns. In a model with limited enforcement, we show that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods an collateral constraints, and durable goods price risk that affects asset values, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

April 30
Huixin Bi, KC Fed
"Sovereign Risk and Fiscal Information: A Look at the U.S. State Default of the 1840s"
Host: Grace Gu
This paper examines how newspaper reporting affects government bond prices during the U.S. state default of the 1840s. Using unsupervised machine learning algorithms, the paper constructs novel “fiscal information indices” for state governments based on U.S. newspapers at the time. The impact of the indices on government bond prices varies over time. Before the crisis, the entry of new states into the bond market spurred competition: more state-specific fiscal news imposed downward pressure on bond prices for established states. During the crisis, more state-specific fiscal information increased (lowered) bond prices for states with sound (unsound) fiscal policy.    

May 7
Diego Perez, NYU
"Global Banks and Systemic Debt Crisis"
Host: Alonso Villacorta
We study the role of financial intermediaries in the global market for risky external debt. We first provide empirical evidence measuring the effect of global banks’ net worth on bond prices of emerging-market economies. We show that, around Lehman Brothers’ collapse, within emerging-market bonds with similar risk, those held by more distressed global banks experienced larger price contractions. We then construct a model of global banks’ lending to emerging economies and quantify their role using our empirical estimates and other key data. In the model, banks’ net worths affect bond prices by the combination of a form of market segmentation and banks’ financial frictions. We show that these banks’ exposure to emerging economies significantly determines their role in propagating shocks. With the current observed exposure, global banks play an important role in transmitting shocks originating in developed economies, accounting for the bulk of the variation of spreads in emerging economies during the recent global financial crisis. Global banks help explain key patterns of debt prices observed in the data, and the evolution of their exposure over recent decades can explain the changing nature of systemic debt crises in emerging economies.

May 8
Galina Hale, Federal Reserve Bank of San Francisco
"Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects"
We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997–2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

May 28
Arvind Krishnamurthy, Stanford
"Foreign Safe Asset Demand and the Dollar Exchange Rate"
Host: Alonso Villacorta
We develop a theory that links the U.S. dollar's valuation in FX markets to foreign investors' demand for U.S. safe assets. When the convenience yield that foreign investors derive from holding U.S. safe assets increases, the U.S. dollar immediately appreciates, thus lowering the foreign investors' expected future return from owning U.S. safe assets. The foreign investors' convenience yield can be inferred from the wedge between the yield on safe U.S. Treasury bonds and currency-hedged foreign government bonds, which we call the U.S. Treasury basis. Consistent with the theory, we find that a widening of the U.S. Treasury basis coincides with an immediate appreciation and a subsequent depreciation of the U.S. dollar. Shocks to news about current and future convenience yields accounts for 54.2% of the quarterly innovations in the dollar. Our results lend empirical support to recent theories of exchange rate determination which impute a special role to the U.S. as the world's provider of safe assets and to the dollar, the world's reserve currency.

Winter 2019

February 5
Francesco Bianchi, Duke University
"The Origins and Effects of Macroeconomics Uncertainty"
Host: Hikaru Saijo

February 25 (*note different day)
Pablo Fuerron, Boston College
"On Regional Borrowing, Default, and Migration"
Migration plays a key role in city finances with every new entrant reducing debt per person and every exit increasing it. We study the interactions between regional borrowing, migration, and default from empirical, theoretical, and quantitative perspectives. Empirically, we document that in-migration rates are positively correlated with deficits, that many cities appear to be at or near state-imposed borrowing limits, and that defaults can occur after booms or busts in productivity and population. Theoretically, we show that migration creates an externality that results in over-borrowing, and our quantitative model is able to rationalize many features of the data because of it. Counterfactuals reveal (1) Detroit should have deleveraged in the financial crisis to avoid default; (2) a return to the high-interest rate environment prevailing in the 1990s has only small long-run effects on city finances; and (3) anticipated bailouts double default rates.

February 26 - CANCELED
Assaf Razin, Cornell
"Financial Globalization and the Welfare State"
Host: Ken Kletzer

February 27 (*note different day)
Pascal Miochaillat, Brown University
"A New Keynesian Model with Wealth in the Utility Function"
The New Keynesian model suffers from several anomalies at the zero lower bound: explosive output and inflation, forward-guidance puzzle, and explosive government-spending multiplier. To resolve these anomalies, we introduce relative wealth into households' utility function; the justification is that relative wealth is a marker of social status, and people value high social status. Since people save not only for future consumption but also to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the equilibrium at the zero lower bound becomes a source instead of a saddle, which resolves all the anomalies.

March 4 (*note different day)
"A Theory of Housing Demand Shocks"
Housing demand shocks are an important source of house price fluctuations and, through the collateral channel, they drive macroeconomic fluctuations as well.   However, these reduced-form shocks in the standard macro models fail to generate the observed large fluctuations in the house price-to-rent ratio.  We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks.  Households with high marginal utility of housing face binding credit constraints, giving rise to a liquidity premium in the aggregated housing Euler equation.  The liquidity premium drives a wedge between the house price and the average rent.  The model implies that credit supply shocks can generate large fluctuations in both the house price and the price-to-rent ratio, consistent with empirical evidence.

March 5
Takeo Hoshi, Stanford
"The Great Disconnect: The Decoupling of Wage and Price Inflation in Japan"
Host: Michael Hutchison

March 12
Emi Nakamura, Berkeley
"The Slope of the Phillips Curve: Estimates from State-Level Data"
Host: Carl Walsh

Fall 2018

October 9
Saki Bigio, UCLA
"A Model of Credit, Money, Interest, and Prices"
Host: Alonso Villacorta
A model integrates a modern implementation of monetary policy into an incomplete markets monetary economy. Monetary policy (MP) sets corridor rates and conducts open market operations and fiscal transfers. These tools grant independent control over credit spreads and inflation. Through the influence on spreads, MP affects the evolution credit, output, and the wealth distribution. Classic experiments illustrate how different instruments have effects through different channels and provide some policy insights: (a) MP can move real loan and deposit rates (both in the long and short-run), (b) opening credit spreads can be desirable, (c) negative reserves rates can increase the lending rates, (d) fiscal transfers can be recessionary if anticipated.

October 16
Michael Siemer, Federal Reserve Board
"The Real Effects of Credit Booms and Busts"
Host: Carl Walsh
We use a comprehensive data set of home mortgage loan originations from HMDA matched with the banks' income and balance sheet statements to analyze how fluctuations in the supply of mortgage credit influence county-level housing prices and local economic outcomes. To isolate fluctuations in the supply of mortgage credit, our identification strategy exploits the fact that banks originate home mortgage loans across multiple counties, which we then link to the bank balance sheet. Our results indicate that changes in the supply of home mortgage credit have significant effects on both housing prices and construction activity during both boom and bust periods. During the 2007{2010 bust period, a relative decline in house prices induced by a reduction in the supply of mortgage credit also leads to a broad-based decline in employment, increased unemployment, a significant decline in the growth of average wages and income per capita, a sharp drop in overall retail sales and a steep decline in auto vehicle purchases. Consistent with the presence of financial market frictions, the pullback in the supply of credit and the associated drop in housing prices during this period led to particularly severe job losses at small and young firms. During the boom, by contrast, credit supply-induced changes in house prices appear to influence employment primarily through their effect on the construction sector with no evidence of broad-based spillovers into other measures of local economic activity.

Lucas Harrenbrueck, Simon Fraser University
"Asset Safety versus Asset Liquidity"
Host: Grace Gu

November 6
Martin Schneider, Stanford
"Money and Banking in a New Keynesian Model"
Host: Hikaru Saijo
This paper studies versions of the New Keynesian model in which the central bank targets the interest rate on an asset that earns a convenience yield. In the simplest such model, the central bank sets the rate on a digital currency that provides payment services and thus a convenience yield directly to households.  We then consider two models of banking, one in which the central bank sets the interest on reserves as the Fed did recently and one in which it sets the federal funds rate as the Fed did before 2007; both assets provide a convenience yield to banks because they serve as collateral to back inside money. We show that in all three models, the price level is determinate even if the Taylor principle does not hold, and the short interest rate is not the only relevant policy tool. Moreover, interest rate policy is less effective than in the standard model: the endogenous response of the convenience yield dampens the impulse response to a monetary policy shock.

November 13
Hugo Hopenhayn, UCLA
"The Rise and Fall of Labor Force Growth: Implications for Firm Demographics and Aggregate Trends"
Host: Brenda Samaniego

November 20
Lucas Herrenbrueck, Simon Fraser University
"Asset Safety versus Asset Liquidity"
Host: Michael Hutchison

November 27
Huiyu Li, San Francisco Fed
"Missing Growth from Creative Destruction"
Host: Brenda Smaniego / Ajay Shenoy

December 4
Robert Marquez, UC Davis
"The Redistributive Effects of Bank Capital Regulation"
Host: Alonso Villacorta
We build a general equilibrium model of banks’ optimal capital structure, where bankruptcy is costly and investors have heterogenous endowments and incur a cost for participating in equity markets. We show that banks raise both deposits and equity, and that investors are willing to hold equity only if adequately compensated. We then introduce (binding) capital requirements and show that: (i) it distorts investment away from productive projects toward storage; or (ii) it widens the spread between the returns to equity and to deposits. These results hold also when we extend the model to incorporate various rationales justifying capital regulation.