Household Debt and Labor Market Fluctuations

The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of a continuous increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.business cycle, labor market, borrowing restrictions

Labor Market Search, Housing Prices and Borrowing Constraints.

Mortgage market deregulation in the early 1980s coincided in time with a sharp break in the cyclical behavior of many variables related to housing and to the labor market. This paper analyses the joint dynamics of labor market variables, output and housing prices in a search model with efficient bargaining and financial frictions. In a setting of household heterogeneity, only mortgaged-backed loans are available for impatient households, whose borrowing cannot exceed a proportion of the expected value of their real estate holdings. This feature of the credit market, together with search and matching frictions in the labor market, establish a strong link between credit constraints and consumption that significantly affects labor market outcomes: hours, wages and vacancies. The model is also able to explain the comovements of housing prices with output, productive investment and consumption. Our analysis confirms that the response of labor market variables to technology shocks has been substantially affected by the changes in the nature and tightness of imperfections in credit markets that occurred in the early 1980s. Allowing for a housing price shock, in addition to the technology shock, the model is also able to explain the observed reduction in the correlation of housing prices with both output and private investment.general equilibrium, borrowing constraints, search frictions, housing prices

Financial Intermediaries and Transaction Costs

We present an overlapping generations model with spatial separation and agents who face unsystematic liquidity risk. In a pure exchange economy, agents engage in life cycle portfolio rebalancing. In an intermediated economy, intergenerational banks or mutual funds cater to diversified clienteles so as to avoid rebalancing transactions. In equilibrium, these intermediaries pay redemptions with portfolio income and never sell secondary assets. We also find that the pure exchange economy has a downward sloping yield curve and is inherently cyclical.Financial Intermediation, Overlapping Generations, Liquidity.

Housing market dynamics and welfare

We augment a closed-economy DSGE model with collateral constraints tied to real estate values by incorporating the time-to-build phenomenon in the housing construction sector. Adding construction sector delays significantly improves business cycle properties of the model relative to the versions with no time-to-build delays or with permanently fixed housing stock. We also find that in the presence of construction lags adding housing prices to the central bank policy function increases aggregate welfare in the economy by up to 0.3 percent of consumption. This result is robust to several specifications of the Taylor rule and to changes in key parameter values.Housing prices; housing construction; time-to-build; welfare.

Firm leverage, household leverage and the business cycle

This paper develops a macroeconomic model of the interaction between consumer debt and firm debt over the business cycle. I incorporate interest rate spreads generated by firm and household loan default risk into a real business cycle model. I estimate the model on US aggregate data. This allows me to analyse the quantitative importance of possible feedback effects between the debt levels of firms and households, and the relative contributions of financial and supply shocks to economic fluctuations. While firm level credit market frictions significantly amplify the response of investment to shocks, they do not amplify output responses. In general equilibrium, higher external financing spreads for households contribute to lower external financing spreads for firms, contrary to traditional Keynesian predictions. Furthermore, total factor productivity shocks remain an important source of business cycles in my model. They are responsible for 71 - 74% of the variance of output and 56 - 69% of the variance of consumption in the model. Financial shocks are important in explaining interest rate spreads and leverage ratios, but they account for less than 11% of the fluctuations in output. My results suggest that other factors, beyond credit market frictions on their own, are necessary to justify an important role for financial shocks in aggregate output fluctuations.Financial frictions; external finance premium; DSGE models; Bayesian estimation; business cycles

Household Leverage and Fiscal Multipliers

We study the size of fiscal multipliers in response to a government spending shock under different household leverage conditions in a general equilibrium setting with search and matching frictions. We allow for different levels of household indebtedness by changing the intensive margin of borrowing (loan-to-value ratio), as well as the extensive margin, defined as the number of borrowers over total population. The interaction between the consumption decisions of agents with limited access to credit and the process of wage bargaining and vacancy posting delivers two main results: (a) higher initial leverage makes it more likely to find output multipliers higher than one; and (b) a positive government expenditure shock always produces a positive multiplier for vacancies and employment. The latter result is in sharp contrast with models in which some households do not have access to the financial market (RoT consumers), in which the implied labor market responses to fiscal shocks are inconsistent with the empirical evidence. We also find that the impact on GDP of consolidations is lower when consumers have a more limited capacity to borrow, and that increasing government spending in an episode of intense private deleveraging can still generate positive and significant effects on consumption and output, although the fiscal output (employment) multiplier decreases (increases) with the intensity of the credit crunch. In the model with indebted impatient households we also observe that output (employment) multipliers decrease (increase) markedly with the degree of shock persistence and increase with the degree of price stickiness.fiscal multipliers, private leverage, labour market search

¡§Fire Sales¡¨ in Housing Market: Is the House- Search Process Similar to a Theme Park Visit?

Three striking empirical regularities have been repeatedly reported: the positive correlation between housing prices and trading volume, and between housing price and time-on-the-market (TOM), and the existence of price dispersion. This short paper provides perhaps the first unifying framework which mimics these phenomena in a simple competitive search framework. In the equilibrium, sellers with heterogeneous waiting costs and buyers are endogenously segregated into different submarkets, each with distinct market tightness and prices. With endogenous search efforts, our model also reproduces the well-documented price-volume correlation. Directions for future research are also discussed.Housing market; Competitive search; Price dispersion; Trading volume; Time on the market

“Fire Sales” in housing market: is the house-searching process similar to a theme park visit?

Three striking empirical regularities have been repeatedly reported: the positive correlation between housing prices and trading volume, between housing price and the time-on-the-market (TOM), and the existence of price dispersion. This short paper provides perhaps the first unifying framework which mimics these phenomena in a simple competitive search framework. In the equilibrium, sellers with heterogeneous waiting cost and buyers are endogenously segregated into different submarkets, each with distinct market tightness and prices. With endogenous search effort, our model also reproduces the well-documented price-volume correlation. Directions for future research are also discussed.housing market, competitive search, price dispersion, trading volume, time on the market

Learning, Incomplete Contracts and Export Dynamics: Theory and Evidence from French Firms

We consider a model where exporting requires finding a local partner in each market. Contracts are incomplete and exporters must learn the reliability of their partners through experience. In the model, export behavior is state-dependent due to matching frictions, although there are no sunk costs. Better legal institutions alleviate contracting frictions especially in sectors with large contracting problems. Thus, measures of legal quality help reduce the risk that a match between an exporter and a local distributor splits, and they are all the more effective in sectors that are more exposed to hold-up problems. Moreover, the breaking risk declines with the age of the relationship, as unreliable partners are weeded out. We find strong evidence in favor of the model's predictions when testing them with a French dataset that includes information on firm-level exports by destination country.Trade Dynamics, Learning, Incomplete Contracts, State dependence, Firm-level Trade Data