Presentations: Midwest Economics Association Annual Meeting (Chicago, US), Midwest Macro Meeting (Purdue University, US), Midwest Macro Meeting (FRB of Kansas City, US), SWET Quantitative Macro (Hokkaido University, Japan), KIF-KAEA Conference (Virginia, US), Economics Graduate Student Conference (Washington University in St. Louis, US), Midwest Macro Meeting (FRB of Cleveland, US), KAEA Job Market Conference (Virtual), Southern Economic Association Annual Meeting (Tampa, US), Asia Meeting of the Econometric Society (NYU Abu Dhabi, UAE)*

Abstract: This paper investigates the aggregate implications of collateralized borrowing constraints in the presence of both productivity and financial shocks. I develop a dynamic stochastic general equilibrium (DSGE) model in which firms’ borrowing capacity depends on the market value of assets, as in Jermann and Quadrini (2012), but augmented with adjustment costs that allow asset prices to respond endogenously. The model features two types of shocks: productivity shocks, which may be amplified through fluctuations in asset prices (the financial accelerator channel), and financial shocks, which directly affect the tightness of borrowing constraints. Quantitative analysis shows that the amplification effect of productivity shocks on macroeconomic fluctuations through asset prices is limited, due to the muted endogenous response of asset prices. In contrast, financial shocks generate direct and substantial effects on firm financing and macroeconomic fluctuations. These results are consistent with earlier findings that question the quantitative relevance of the financial accelerator channel in business cycle models.

Abstract: This paper studies the quantitative relevance of self-fulfilling crises when sovereign debt has a realistic long-term maturity structure. While much of the existing literature finds that such crises require near one-year maturities or implausibly high debt levels to become quantitatively meaningful, this work systematically explores the full parameter space of a benchmark sovereign default model to identify when crisis zones emerge and how large they are under empirically relevant maturities. Calibrated to match observed debt duration and output dynamics in the European peripheries, the paper measures how frequently the economy enters the multiplicity region, rather than simply establishing that it exists. A key result is that the presence of a minimum subsistence level of consumption plays a critical role in determining whether self-fulfilling crises are quantitatively large and frequent.