Working Papers

The Macroeconomic Effects of Shadow Banking Panics (March 2020),

We study the effects of shadow banking panics in a macroeconomic model with a rich financial system, including deposit-financed retail banks and wholesale-financed shadow banks. Shadow banking panics occur when retail banks choose not to roll over their lending to shadow banks. Occasionally binding financial constraints of retail banks increase the likelihood and amplify the severity of such shadow banking panics. The model can quantitatively match the dynamics of key macroeconomic and financial variables around the US financial crisis. We quantify the impact of wholesale funding market interventions akin to those implemented by the Federal Reserve in 2008, finding that they reduced the fall in output by about half a percentage point. Unconditionally, central bank interventions reduce output volatility and the likelihood of banking panics .

Older Version with Xue Zhang: [MPRA]

Banking Panic Risk and Macroeconomic Uncertainty (January 2020), with Jakob Guldbæk Mikkelsen,

We show that systemic risk in the banking sector breeds macroeconomic uncertainty. We develop a model of a production economy with a banking sector where financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility, increases risk premia on asset prices and yields a new benefit from countercyclical bank capital buffers.

Mortgage Defaults, Bank Runs and Regulation in a Housing Economy (June 2019), with Marcus Mølbak Ingholt and Xue Zhang,

We develop a macroeconomic model capturing the linkages between house price fluctuations, mortgage defaults, and bank runs. In the model, endogenous house price drops can lead to bank runs if losses on mortgage lending push the liquidation value of the banking sector below the value of the sector's outstanding deposits. Once a series of output shocks is simulated for the model to match output, the model predicts the historical movements in key real and financial variables in the U.S. Moreover, bank runs are ruled out during the mid-2000s boom and attain a high probability during the Savings and Loan Crisis and the Great Recession. We use the model to evaluate different macroprudential policies. Stricter loan-to-value standards and bank capital requirements reduce the frequency of bank panics, but at the cost of impeding financial intermediation over the business cycle. A dynamic capital requirement is contrarily able to both curb systemic risk and support intermediation, as this tightening only binds in times of financial distress.

Corporate Debt Maturity and Investment over the Business Cycle (New version coming soon)

I study the business cycle dynamics of the maturity structure of the debt of U.S. non-financial firms. I document three facts: First, the aggregate share of long-term debt in total debt is pro-cyclical. Second, the long-term debt share of small firms has a higher standard deviation and correlation with output than the long-term debt share of large firms. Third, large firms tend to use a larger share of long-term debt in general. To account for these facts, I construct a quantitative dynamic equilibrium model in which firms optimally choose investment, leverage, debt maturity, dividends, and default, subject to idiosyncratic and aggregate risk. When they choose their debt maturity, firms trade off default premia and rollover costs. As a result, financially constrained firms endogenously prefer to issue short-term debt, because they face high default premia on long-term debt. Financially unconstrained firms issue long-term debt, because it has lower rollover costs. The model, which is parameterized to match cross-sectional moments, can match stylized facts about the level and dynamics of the maturity structure of debt, both in the aggregate and along the firm size distribution.

Policy Work

The Effects of the Corona Shock on the Banking Sector and the Real Economy (June 2020)

This economic memo isolates two channels through which the "corona shock" affects the economy: a fall in asset prices and an increase in the dispersion of future shocks to the economy. Both shocks are contractionary, but they operate through different channels. A CCyB that is reactivated early reduces the impact of an asset price shock the most. In contrast, a CCyB that is reactivated late reduces the impact of a volatility shock the most. Overall, the corona-shock warrants an early build-up of the CCyB.

Work in Progress

The Consumption Effects of Household Financial Distress, with Florian Exler

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