Working Papers

Leverage Cycle over the Life cycle: A Quantitative Model of Endogenous Leverage

Job Market Paper 

(Download the Latest Version of My Paper)

Abstract: This paper provides a quantitative model that rationalizes two well-established facts on the US housing market: leverage moves in tandem with housing prices, whereas mortgage spreads move in the opposite direction. In this model, a large number of overlapping generations accumulate housing assets using leverage. They select mortgage contracts from a menu that specifies interest rates for various levels of loan-to-value ratio (LTV), often called a Credit Surface. Within this framework, large negative endowment shocks not only reduce housing prices due to households' decreased purchasing power but also reinforce the decline by weakening the ability of houses to serve as collateral for borrowing. The Credit Surface rises and gets steeper as interest rates and spreads increase in downturns. In an application calibrated to the Great Recession, my model matches the 10-percentage-point drop in the leverage of first-time homebuyers that was observed at that time.

Work in Progress

Monitoring the Credit Surface: Macro-prudential Policy and Leverage

Joint with Ana Fostel and Eric Young 

Abstract: Market outcomes in an economy with endogenous leverage are inefficient. In the presence of a strong feedback loop between leverage and asset prices, large endowment shocks can generate leverage cycles, resulting in significant volatilities in prices and household consumption. To attenuate leverage cycles, we explore different methods of applying macro-prudential policy and compare the resulting outcomes across these implementations. Specifically, imposing taxes on debt contracts on the ascending segment of the Credit Surface induces younger households to reallocate their risky portfolios towards safer assets, which reduces price volatility. Applying a uniform tax rate to all contracts on the Credit Surface also reduce price volatility, despite young households retaining their preference for risky portfolios.