Research

Working Papers

Rate caps on revolving credit lines with Gajendran Raveendranathan and Guillaume Sublet [PDF] - Accepted Journal of Political Economy Macroeconomics

We show how the revolving nature of credit lines - long-term contracts for access to short-term debt - matters for the regulation of credit card interest rates. First, revolving credit lines introduce history dependence to credit access. As a result, the transition path is key for the magnitude of gains. Second, the competition for credit offers to existing accounts dilutes the profitability of revolving contracts, which reduces credit offers to consumers without existing credit access. In a model calibrated to target salient features of the U.S. credit card market, we find that rate caps tailored to credit access are twice as effective in generating efficiency gains compared to the commonly studied uniform cap. The gains from tailoring rate caps beyond credit access are small.

Publications

Borrowing into Debt Crises with Radoslaw Paluszynski [PDF] - Quantitative Economics (2023, volume 14, issue 1, p. 277-308)

Quantitative models of sovereign debt predict that governments reduce borrowing during recessions to avoid debt crises. A prominent implication of this behavior is that the resulting volatility of interest rate spread is counterfactually low. We propose that governments borrow into debt crises because of frictions in the adjustment of their expenditures. We develop a model of government good production which uses public employment and intermediate consumption as inputs. The inputs have varying degrees of downward rigidity which means that it is costly to reduce them. Facing an adverse income shock, the government borrows to smooth out the reduction in public employment, which results in increasing debt and higher spread. We quantify this rigidity using the OECD government accounts data and show that it explains 72% of the missing bond spread volatility.

IMF Lending in Sovereign Default [PDF] - Macroeconomic Dynamics (2024, volume 28, issue 1, p. 112-146)

This paper proposes that an IMF policy shift was the reason behind major changes in sovereign debt negotiation outcomes observed in 1989. The new policy, in marked departure from past policy, allowed the IMF to lend to nations in default. The paper documents stark improvements in debt forgiveness and post-negotiation debt servicing ability coincident with the IMF policy shift. A theoretical framework is proposed in which the IMF policy shift causes the observed changes in negotiation outcomes. The model highlights the policy’s potential to improve a country’s outside option during negotiations of defaulted debt.

The Unprecedented Fall in U.S. Revolving Credit with Gajendran Raveendranathan [PDF] - International Economic Review (2025, volume 66, issue 1, p. 393-451)

After decades of consistent growth, U.S. revolving credit declined drastically post 2009. We study the Ability to Pay provision of the Credit CARD Act of 2009, a policy that restricts credit card limits, as a contributing factor. Extending a model of revolving credit lines, we find that the impact of the policy on the decline in revolving credit is significant (54-60 percent). Further, the policy accounts for lower utilization rates despite tighter credit limits and higher spreads despite lower default risk. The policy’s goal of consumer protection is achieved for a few consumers with time inconsistent preferences; most are hurt.

Policy Work

Capital Requirements and Bailouts with Fabrizio Perri [PDF] - Quarterly Review, Federal Reserve Bank of Minneapolis

We use balance sheet data and stock market data for the major U.S. banking institutions during and after the 2007-8 financial crisis to estimate the magnitude of the losses experienced by these institutions because of the crisis. We then use these estimates to assess the impact of the crisis under alternative, and higher, capital requirements. We find that substantially higher capital requirements (in the 20% to 30% range) would have substantially reduced the vulnerability of these financial institutions, and consequently they would have significantly reduced the need of a public bailout.

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