Publications
The Origins of Aggregate Fluctuations in a Credit Network Economy, Journal of Monetary Economics, vol. 117, pp. 316-334, January 2021.
FEDS working paper, Technical Appendix
I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms then transmit financial shocks across the economy, amplifying their effects on aggregate output. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. Counterfactual exercises suggest these credit network effects can be a powerful amplification mechanism. I estimate aggregate and idiosyncratic shocks to industries in the US and find that financial shocks are a prominent driver of observed cyclical fluctuations: more than two-thirds of the drop in industrial production during the Great Recession is accounted for by financial shocks. Furthermore, idiosyncratic financial shocks to a few key industries can explain a considerable portion of these effects. In contrast, while productivity shocks played a meaningful role before 2007, they had a negligible impact during the Great Recession.
Collective Moral Hazard and the Interbank Market (with Joseph E. Stiglitz), American Economic Journal: Macroeconomics, vol. 15, no. 2, pp. 35-64, April 2023.
NBER working paper, FEDS working paper, VoxEU column, LSE Business Review
The concentration of risk within financial system is considered to be a source of systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions. We build a model of portfolio choice and endogenous contracts in which the government optimally intervenes during crises. By issuing financial claims to other institutions, relatively risky institutions endogenously become large and interconnected. This structure enables institutions to share the risk of systemic crisis in a privately optimal way, but channels funds to relatively risky investments and creates incentives even for smaller institutions to take excessive risks. Constrained efficiency can be implemented with macroprudential regulation designed to limit the interconnectedness of risky institutions.
Working Papers
A Theory of Safe Asset Creation, Systemic Risk, and Aggregate Demand, revision requested by The Review of Financial Studies, June 2025
This paper theoretically studies the macroeconomic implications of safe assets. The creation of safe assets leads to demand-driven fluctuations in output due to a general equilibrium feedback between systemic risk and aggregate demand: Safe asset issuance by banks paradoxically generates a risk of future crisis (systemic risk). This creates a precautionary demand for safe assets, lowering aggregate demand for goods ex ante. The natural rate of interest is therefore determined by the level of systemic risk. If systemic risk is sufficiently high, the natural rate falls below the effective lower bound on monetary policy, leading to a demand-driven recession. The economy may enter a risk-driven stagnation trap in which persistently low output growth arises due to excessive systemic risk. Public safe asset issuance, by contrast, has more benign effects on systemic risk. Therefore, central bank purchases of risky assets stimulate aggregate demand by absorbing risk from banks. Macroprudential policy actively stimulates aggregate demand when monetary policy is constrained.
Information Spillovers, Funding Liquidity, and Financial Stability (with Jin-Wook Chang), May 2025
We develop a theory of beliefs and financial stability in which beliefs about fundamentals are shaped by the availability of liquidity in funding markets. Agents exchange debt contracts to invest in a risky asset. They receive private signals about the fundamental of the asset and are subject to idiosyncratic liquidity shocks. Agents can partially, but never fully, infer their counterparties' private information from asset prices or the cost funding. As a result, liquidity shocks in funding markets lead to belief-driven booms or busts. Abundant funding liquidity leads to exuberance, while tight liquidity leads to pessimism. Information spillovers, whereby asset prices affect agents' beliefs, may amplify or dampen the likelihood and severity of fire sales depending on the underlying shock. Central bank lending facilities may stabilize markets in part by reducing the informativeness of asset prices, thereby reducing the volatility of beliefs.
Trade Credit and Network Contagion: Evidence from Chile (with Renata Abbot and Patricio Toro), Draft coming soon
We investigate the role of trade credit and input-output linkages in propagating shocks across a network of firms using supervisory, transaction-level data on the universe of firms in Chile. We use two natural experiments to identify credit supply shocks to firms, and to estimate how these shocks propagate through the network of firms. Using a general model of trade credit with minimal restrictions, we decompose these estimated effects into two channels: a trade credit channel, which captures how firms modify the price and quantity of credit to one another; and an input-output channel, which captures how firms modify the price and quantity of goods and services sold to one another. We use the input-output network of these firms to aggregate these effects across firms and to size the relative importance of each channel. Overall, our results indicate that trade credit lending is an important way that financial shocks propagate across firms and leads to sizable aggregate effects.
Work in Progress
Safe Assets and the International Financial Architecture (with Martín Guzmán and Joseph E. Stiglitz)
Beliefs and the Informational Efficiency of Financial Markets (with Jin-Wook Chang)
Book Chapters
Information Spillovers and Interconnectedness in Financial Markets. Chapter forthcoming in the Festschrift in Honor of Joseph Stiglitz.