Risk-sharing in heterogenous agent models with incomplete markets.

This thesis examines the impact of different risk sharing arrangements under incomplete financial markets on macroeconomic outcomes. The first two chapters are joint work with Giacomo Rodano. In the first chapter, we examine the effects of Chapter 7 of the US bankruptcy law on entrepreneurs. The latter are subject to production risk. They can borrow and in case they fail they can default on their debt. We examine the optimal wealth exemption level and the optimal credit market exclusion duration in this environment. In addition to unsecured credit, entrepreneurs can also obtain secured credit in the second chapter. Secured credit lowers the cost of a generous bankruptcy regime because agents who are rationed out of the unsecured credit market can still obtain secured credit. Therefore, the optimal exemption level is relatively high. In the third chapter, I investigate the effects of wealth exemptions on interest rates if entrepreneurs can choose the riskiness of their project. The default possibility leads to a kink in the value function which makes agents locally risk-loving. In the fourth chapter, I focus on consumers only. In particular, I show that wealth exemptions are of particular importance in a model with expense shocks. Wealth exemptions encourage people to save more so that aggregate savings rise. The model is also consistent with the fact that consumer bankruptcy cases are not correlated with wealth exemption levels. The fifth chapter is joint work with Rigas Oikonomou. We compare two environments: on the one hand the standard one in which a household consists of one member and, on the other hand, one in which a household consists of two members who share their risks perfectly. We investigate the differences between the two models in labor market flows and volatilities of labor market statistics in response to productivity shocks

The rise of the added worker effect

We document that the added worker effect (AWE) has increased over the last three decades. We develop a search model with two earner households and we illustrate that the increase in the AWE from the 1980s to the 2000s can be explained through (i) the narrowing of the gender pay gap, (ii) changes in the frictions in the labor market and (iii) changes in the labor force participation costs of married women

Household Search and the Aggregate Labour Market

We develop a theoretical model with labour market frictions, incomplete financial markets, and with households which have two members. Households face unemployment risks, but their members adjust their labour supplies to insure against unemployment. We use the model to explain the cyclical properties of aggregate employment and participation. As in the U.S. data, the model predicts that the participation rate (the fraction of individuals that want jobs) is not strongly correlated with aggregate economic activity. This property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions, when we assume bachelor households or households with infinitely many members (complete markets). In the two-member household model and in the data, primary earners are always in the labour force, secondary earners have a mildly countercyclical participation rate, and a mildly procyclical employment rate. Their behaviour insures the household against unemployment risks

Household search and the aggregate labor market

We develop a theoretical model with labor market frictions, incomplete financial markets and with households which have two members. Households face unemployment risks but their members adjust their labor supplies to insure against unemployment. We use the model to explain the cyclical properties of aggregate employment and participation. As in the US data, the model predicts that the participation rate (the fraction of individuals that want jobs) is not strongly correlated with aggregate economic activity. This property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions, when we assume bachelor households or households with infinitely many members (complete markets). In the two member household model and in the data, primary earners are always in the labor force, secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate. Their behavior insures the household against unemployment risks

The rise of household insurance

Since the 1980s, US households have been increasingly using joint labour supply as an insurance device against unemployment shocks. The added worker effect, measured as the increase in the flows into the labour force for individuals whose spouses have become unemployed, increased from roughly 8% to about 13%. To make sense of this pattern, we construct a Bewley-Aiyagari model with dual earner households and search frictions in the labour market. We subject the model to several well-known structural changes that have occurred in the US labour market since the 1980s: declining gender wage gaps, changes in labour market frictions and in attitudes towards female employment and finally higher wage inequality. We show that the first three structural changes resulted in a higher insurance value of added workers and made households focus more on this margin. In contrast, higher wage risk, associated with more uncertain outcomes following unemployment, has not contributed to the increase in the added worker effect that we document

continuous support and guidance. We also benefited a lot from the comments of Arpad Abraham,

Sharing risks is one of the essential economic roles of families. The importance of this role increases in the amount of uncertainty that agents face and the degree of financial market incompleteness. We develop a theory of joint household search in frictional labor markets under incomplete financial markets. Couples households can insure themselves by savings and by timing their labor market participation. We show that this theory can match one aspect of the US data that conventional search models cannot match; that whilst aggregate employment is pro-cyclical and unemployment counter-cyclical their sum, the labor force is acyclical. In our model, and in the US data, when a family member loses her job in a recession the other family member joins the labor force to provide insurance. We also explore other important implications of our theory for the aggregate labor market. Our analysis offers new insights for the cyclical behavior of the labor wedge in models of heterogeneous agents and wealth accumulation

Banks' Net Interest Margin and the Level of Interest Rates

Reproduction permitted only if source is stated. ISBN Non-technical summary Research Question Net interest income is the main source of income for banks. As a result of carrying out maturity transformation, banks' net interest income is affected in the short run by the dynamics in the term structure. Therefore, as a rule, an increase in interest rates leads to a decline in net interest income in the following years. However, little is known about the medium and long-term effects of changes in the interest rate level. Anecdotal evidence suggests that net interest income benefits in the medium and long term if interest rates increase. This paper also investigates the effects of the low interest rate environment on the margin for customer deposits. Contribution The short-run effect of a change in the interest rate level is widely discussed and empirically investigated in the literature. The medium and long-term effects are harder to detect, however, because short-term developments mask this effect and the applied datasets often cover a period of only up to 20 years. In this paper, the authors use a dataset that covers more than 40 years and a model which nevertheless allows them to differentiate between the short-and long-run effects of a rise in the interest rate level. Results The paper shows that banks' net interest income benefits over the medium to long-term horizon if the interest rate level increases. An increase of 100 basis points in the interest rate level leads to an increase in the net interest margin of about 7 basis points. It is therefore possible to demonstrate empirically that the short-term effect and medium to long-term effects on banks' net interest margin are diametrically opposed. Furthermore, the authors find that the margins for retail deposits have declined by up to 97 basis points owing to the low interest rate environment. Nichttechnische Zusammenfassung Fragestellung Das Zinsergebnis ist die wichtigste Einnahmequelle der Banken. Dadurch, dass Banken Fristentransformation betreiben, ist das Zinsergebnis in der kurzen Frist von der Dynamik der Zinsstruktur betroffen. Ein Ansteigen der Zinsen führt dadurch in der Regel zu abnehmenden Zinsergebnissen in den Folgejahren. Über die mittel-und langfristige Wirkung von Änderungen des Zinsniveaus ist dagegen wenig bekannt. Anekdotische Evidenz legt nahe, dass das Zinsergebnis mittel-und langfristig profitiert, wenn das Zinsniveau ansteigt. Auch wird in dem Papier die Wirkung untersucht, die das gegenwärtige Niedrigzinsumfeld auf die Margen der Kundeneinlagen hat. Beitrag Der kurzfristige Effekt einer Veränderung der Zinsstrukturkurve wird in der Literatur ausgiebig diskutiert und empirisch untersucht. Mittel-und langfristige Entwicklungen dagegen sind schwerer nachzuweisen, weil kurzfristige Entwicklungen den Effekt überlagern und die verwendeten Zeitreihen in der Regel nur bis zu 20 Jahre betragen. In diesem Papier verwenden die Autoren einen Datensatz, der mehr als 40 Jahre umfasst, und ein entsprechend spezifiziertes Modell, das es ihnen erlaubt, zwischen den kurzfristen Effekten einer Erhöhung des Zinsniveaus auf der einen Seite und deren langfristigen Effekten auf der anderen Seite zu unterscheiden. Ergebnisse Das Papier zeigt, dass das Zinsergebnis der Banken mittel-bis langfristig profitiert, wenn sich das Zinsniveau erhöht, und zwar steigt die Zinsspanne um ungefähr 7 Basispunkte je 100 Basispunkte Zinsniveauerhöhung. Damit kann empirisch gezeigt werden, dass der kurzfristige und der mittel-bis langfristige Effekt gegensätzlich sind in ihrer Wirkung auf das Zinsergebnis der Banken. Auch finden die Autoren, dass die Margen für die Kundeneinlagen durch das Niedrigzinsumfeld um bis 97 Basispunkte zurückgegangen sind. Abstract An increase in the level of interest rates is said to have a negative impact on banks' net interest margins in the short run. Using a time series of more than 40 years for the German banking system, we show that the opposite effect exists in the long run, where an increase in the level of interest rates by 100 basis points leads to an estimated increase of 7 basis points in the banks' net interest margin. In addition, we analyze the consequences of the low-interest rate environment and find that banks' interest margins for retail deposits, especially for term deposits, have declined by up to 97 basis points

Characterizing the financial cycle: evidence from a frequency domain analysis

Abstract A growing body of literature argues that the financial cycle is considerably longer in duration and larger in amplitude than the business cycle and that its distinguishing features became more pronounced over time. This paper proposes an empirical approach suitable to test these hypotheses. We parametrically estimate the whole spectrum of financial and real variables to obtain a complete picture of their cyclical properties. We provide strong statistical evidence for the US and slightly weaker evidence for the UK validating the hypothesized features of the financial cycle. In Germany, however, the financial cycle is, if at all, much less visible