Review of Financial Studies, revise and resubmit
CEPR-TFI Household Finance Award, 2020
AREUEA Homer Hoyt Dissertation Award (honorable mention), 2021
Media: INSEAD Knowledge
This paper demonstrates that the protracted decrease in young homeownership since the Great Recession was driven by high-house price regions, despite credit standards changing mostly nationally. Using a panel of U.S. metro areas, I calibrate an equilibrium spatial macro-finance model with overlapping generations of mobile households. Aggregate and regional housing dynamics are explained more by the heterogeneous impacts of an aggregate credit tightening than by local shocks. Lower Millennial income and wealth amplify this effect. The impact of subsidies to first-time buyers is dampened, because they fail to stimulate regions that suffer larger busts. Place-based subsidies achieve larger gains.
How do shocks to banks transmit to the price and non-price terms of loans? We build a model of multidimensional contracting between heterogeneous risky borrowers and intermediaries with limited lending capacity and show that loan terms depend on two moments: the elasticities of loan demand and default rates to interest rates. These two sufficient statistics predict how the cross-section of loan terms and banks' portfolio risk react to changes in lenders' capital, funding costs and regulation, and borrowers' risk and liquidity. Using empirical estimates, we show that they explain differences in the pass-through of shocks between markets and risk categories. They also drive the dynamic incidence of credit crises through impact and persistence.
Financial constraints can lead to persistent disparities in wealth across demographic groups and geographies. We document large differences in housing leverage by race, mirroring well established differences in pre-existing wealth and family assistance via bequests. Financial constraints—particularly leverage constraints—lead minority borrowers to specific mortgage channels, especially Federal Housing Administration (FHA) loans. Use of these channels in turn limits access to high opportunity areas. We use a structural model to highlight the persistent impact of these initial conditions for asset purchases on spatial misallocation and long-term wealth accumulation for minority borrowers. Our model highlights tensions in policies to address racial gaps in wealth, leverage and homeownership. Highly effective policies for addressing the racial wealth gap—e.g. direct transfers—have relatively little impact on the homeownership gap. Most households adjust their leverage or location choice but not the decision to buy. Many policies that explicitly target housing shrink the wealth gap at the top of the distribution with little effect at or below the median. Our results highlight important inequalities in use of the housing ladder as a means of wealth accumulation, and difficult tradeoffs and tensions in policies intended to address these disparities.
Changes in credit supply induce large and frequent variations in households' access to unsecured debt. They generate a novel financial precautionary motive, which compounds the microeconomic motive associated with idiosyncratic income risk, as borrowers deleverage and accumulate safe assets to hedge against them. Using a structural model, I estimate that this motive is an important driver of household balance sheets over the business cycle. It also helps explains the historically low level of interest rates in the last decade despite consumption growth, solving a post-Great Recession risk-free rate puzzle.
Review of Economic Studies, forthcoming
Internationalization versus Regionalization in the Emerging Stock Markets, with Virginie Coudert and Karine Herve
International Journal of Economics and Finance, Vol. 20(1), pp. 16-27, 2015