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About Me
I am the Judy C. Lewent (1972) and Mark Shapiro Career Development Professor and and Assistant Professor of Finance at the MIT Sloan School of Management. My research is at the intersection of macroeconomics and finance, with special focus on housing and mortgage markets, the links between the stock market and the macroeconomy, and the structure of corporate debt. Comments and feedback are always welcome. You can read my new op-ed arguing for public furlough assistance, a program of paid leaves of absence for workers at businesses harmed by Covid-19, here. Email: dlg (at) mit (dot) edu Mailing Address: 100 Main Street, Building E62 Office E62-641 Cambridge, MA 02142 |
Working Papers
The Mortgage Credit Channel of Macroeconomic Transmission (Updated Feb, 2018; SSRN; Dynare Code)
Revise and Resubmit, Journal of Political Economy
Abstract: I investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income — features that prove essential to reproducing observed debt dynamics. The resulting environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy more easily stabilizes inflation, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears vital for explaining the recent boom. A cap on payment-to-income ratios, not loan-to-value ratios, is the more effective macroprudential policy for limiting boom-bust cycles.
Financial Fragility with SAM? (Updated Dec, 2019; SSRN; Slides; Non-Technical Summary)
with Tim Landvoigt and Stijn Van Nieuwerburgh
Revise and Resubmit, Journal of Finance
Abstract: Shared Appreciation Mortgages feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, the home owner's gains from payment relief are the mortgage lender's losses. A general equilibrium model where financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk-sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing.
Firm Debt Covenants and the Macroeconomy: The Interest Coverage Channel (Updated July 2019; Slides)
Abstract: Interest coverage covenants, which set a maximum ratio of interest payments to earnings, are among the most popular provisions in firm debt contracts. For affected firms, the amount of additional debt that can be issued without violating these covenants is highly sensitive to interest rates. Combining a theoretical model with firm-level data, I find that interest coverage limits generate strong amplification from interest rates into firm borrowing and investment. Importantly, most firms that have interest coverage covenants also face a maximum on the ratio of the stock of debt to earnings. Simultaneously imposing these limits implies a novel source of state-dependence: when interest rates are high, interest coverage limits are tighter, amplifying the influence of interest rate changes and monetary policy. Conversely, in low-rate environments, debt-to-earnings covenants dominate and transmission is weakened.
Do Credit Conditions Move House Prices? (Updated July 2019; Slides)
with Adam Guren
Abstract: To what extent did an expansion and contraction of credit drive the 2000s housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving the entire house price cycle. We
show that the key difference behind these disparate results is how rental markets are modeled: assuming perfect segmentation between rental and owner-occupied housing leads to large effects of credit on house prices, while assuming frictionless
rental markets makes credit irrelevant for house prices. We develop a model with frictional rental markets that nests both extremes and allows us to consider intermediate cases. We argue that the relative elasticity of the price-to-rent ratio and
homeownership with respect to an identified credit shock is a sufficient statistic to measure these frictions. We estimate this moment, and use it to calibrate our model. Our results imply that rental markets are highly frictional and close to segmented, consistent with large effects of credit on house prices. Experiments using the structural model imply that credit conditions explain between 29% and 46% of the rise in price-rent ratios over the boom.
How the Wealth was Won: Factor Shares as Market Fundamentals (Updated Apr, 2019; Barron's)
with Martin Lettau and Sydney C. Ludvigson
Abstract: We provide novel evidence on the driving forces behind the sharp increase in equity values over the post-war era. From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonfinancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created, but economic growth accounted for 92% of it.
Origins of Stock Market Fluctuations (Updated Oct, 2016; VoxEU, MarketWatch; SSRN)
with Martin Lettau and Sydney C. Ludvigson
Abstract: Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.
The Mortgage Credit Channel of Macroeconomic Transmission (Updated Feb, 2018; SSRN; Dynare Code)
Revise and Resubmit, Journal of Political Economy
Abstract: I investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income — features that prove essential to reproducing observed debt dynamics. The resulting environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy more easily stabilizes inflation, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears vital for explaining the recent boom. A cap on payment-to-income ratios, not loan-to-value ratios, is the more effective macroprudential policy for limiting boom-bust cycles.
Financial Fragility with SAM? (Updated Dec, 2019; SSRN; Slides; Non-Technical Summary)
with Tim Landvoigt and Stijn Van Nieuwerburgh
Revise and Resubmit, Journal of Finance
Abstract: Shared Appreciation Mortgages feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, the home owner's gains from payment relief are the mortgage lender's losses. A general equilibrium model where financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk-sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing.
Firm Debt Covenants and the Macroeconomy: The Interest Coverage Channel (Updated July 2019; Slides)
Abstract: Interest coverage covenants, which set a maximum ratio of interest payments to earnings, are among the most popular provisions in firm debt contracts. For affected firms, the amount of additional debt that can be issued without violating these covenants is highly sensitive to interest rates. Combining a theoretical model with firm-level data, I find that interest coverage limits generate strong amplification from interest rates into firm borrowing and investment. Importantly, most firms that have interest coverage covenants also face a maximum on the ratio of the stock of debt to earnings. Simultaneously imposing these limits implies a novel source of state-dependence: when interest rates are high, interest coverage limits are tighter, amplifying the influence of interest rate changes and monetary policy. Conversely, in low-rate environments, debt-to-earnings covenants dominate and transmission is weakened.
Do Credit Conditions Move House Prices? (Updated July 2019; Slides)
with Adam Guren
Abstract: To what extent did an expansion and contraction of credit drive the 2000s housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving the entire house price cycle. We
show that the key difference behind these disparate results is how rental markets are modeled: assuming perfect segmentation between rental and owner-occupied housing leads to large effects of credit on house prices, while assuming frictionless
rental markets makes credit irrelevant for house prices. We develop a model with frictional rental markets that nests both extremes and allows us to consider intermediate cases. We argue that the relative elasticity of the price-to-rent ratio and
homeownership with respect to an identified credit shock is a sufficient statistic to measure these frictions. We estimate this moment, and use it to calibrate our model. Our results imply that rental markets are highly frictional and close to segmented, consistent with large effects of credit on house prices. Experiments using the structural model imply that credit conditions explain between 29% and 46% of the rise in price-rent ratios over the boom.
How the Wealth was Won: Factor Shares as Market Fundamentals (Updated Apr, 2019; Barron's)
with Martin Lettau and Sydney C. Ludvigson
Abstract: We provide novel evidence on the driving forces behind the sharp increase in equity values over the post-war era. From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonfinancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created, but economic growth accounted for 92% of it.
Origins of Stock Market Fluctuations (Updated Oct, 2016; VoxEU, MarketWatch; SSRN)
with Martin Lettau and Sydney C. Ludvigson
Abstract: Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.
Publications
Rare Shocks, Great Recessions (Published Version, Appendix)
with Vasco Curdia and Marco Del Negro.
Journal of Applied Econometrics, Vol. 29(7), pp. 1031-1052, November/December 2014.
Winner: 2016 Richard Stone Prize, awarded to the best paper with substantive econometric application in the 2014 and 2015 volumes of the Journal of Applied Econometrics.
Abstract: We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student's t distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student's t specification is strongly favored by the data even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession period from the sample. We also show that inference about low-frequency changes in volatility -- and in particular, inference about the magnitude of Great Moderation -- is different once we allow for fat tails.
Rare Shocks, Great Recessions (Published Version, Appendix)
with Vasco Curdia and Marco Del Negro.
Journal of Applied Econometrics, Vol. 29(7), pp. 1031-1052, November/December 2014.
Winner: 2016 Richard Stone Prize, awarded to the best paper with substantive econometric application in the 2014 and 2015 volumes of the Journal of Applied Econometrics.
Abstract: We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student's t distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student's t specification is strongly favored by the data even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession period from the sample. We also show that inference about low-frequency changes in volatility -- and in particular, inference about the magnitude of Great Moderation -- is different once we allow for fat tails.
Work in Progress
Managing a Housing Boom (Slides)
with Jason Allen
Quantitative Tightening: Challenges of Two-Dimensional Monetary Normalization (Slides)
with Vadim Elenev and Miguel Faria-e-Castro
Managing a Housing Boom (Slides)
with Jason Allen
Quantitative Tightening: Challenges of Two-Dimensional Monetary Normalization (Slides)
with Vadim Elenev and Miguel Faria-e-Castro
Non-Academic Articles
A Traditional Economic Stimulus Won't Work. Here's What Might.
Marker/Medium, March 24, 2020
A Traditional Economic Stimulus Won't Work. Here's What Might.
Marker/Medium, March 24, 2020
Discussion Slides
Mortgage Pricing and Monetary Policy
By Matteo Benetton, Alessandro Gavazza, and Paolo Surico
FRBSF Advances in Financial Research Conference, Oct 2019
Competition and Incentives in the Mortgage Market: The Role of Brokers
By Claudia Robles-Garcia
NBER Household Finance Meeting, Jul 2019
Human Capitalists
By Andrea Eisfeldt, Antonio Falato, and Mindy Xiaolan
Texas Finance Festival, Apr 2019
Is Housing the Business Cycle? A Multi-resolution Analysis for OECD Countries
By Yuting Huang, Qiang Li, Kim Hiang Liow, and Xiaoxia Zhou
AREUEA Annual Meetings, Jan 2019
Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
By David Berger, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra
NBER Monetary Economics Meeting, Nov 2018
State Dependency of Monetary Policy: The Refinancing Channel
By Martin Eichenbaum, Sergio Rebelo, and Arlene Wong
NBER Economic Fluctuations and Growth Meeting, Oct 2018
Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices
By Deeksha Gupta
Tepper-LAEF Conference, Sep 2018
Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and its Aftermath
By Antonio Falato, Giovanni Favara, and David Scharfstein
SFS Cavalcade, May 2018
Anatomy of Corporate Borrowing Constraints
By Chen Lian and Yueran Ma
NBER Monetary Economics Meeting, Mar 2018
Color and Credit: Race, Regulation, and the Quality of Financial Services
By Taylor Begley and Amiyatosh Purnanandam
UNC Junior Faculty Roundtable, Dec 2017
An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts
By Tomasz Piskorski and Alexei Tchistyi
10th Macro Finance Society Workshop, Boston, Nov 2017
Regulating Household Leverage
By Anthony DeFusco, Stephanie Johnson, and John Mondragon
Housing: Micro Data, Macro Problems. Bank of England, Jun 2017
The Equity Premium and the One Percent
by Alexis Toda and Kieran Walsh
AFA Annual Meeting, Chicago, Jan 2017
Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
by Martin Floden, Matilda Kilstrom, Josef Sigurdsson, and Roine Vestman
AEA Annual Meeting, Chicago, Jan 2017
Regional Heterogeneity and Monetary Policy
by Martin Beraja, Andreas Fuster, Erik Hurst, and Joseph Vavra
AEA Annual Meeting, Chicago, Jan 2017
Mortgage Pricing and Monetary Policy
By Matteo Benetton, Alessandro Gavazza, and Paolo Surico
FRBSF Advances in Financial Research Conference, Oct 2019
Competition and Incentives in the Mortgage Market: The Role of Brokers
By Claudia Robles-Garcia
NBER Household Finance Meeting, Jul 2019
Human Capitalists
By Andrea Eisfeldt, Antonio Falato, and Mindy Xiaolan
Texas Finance Festival, Apr 2019
Is Housing the Business Cycle? A Multi-resolution Analysis for OECD Countries
By Yuting Huang, Qiang Li, Kim Hiang Liow, and Xiaoxia Zhou
AREUEA Annual Meetings, Jan 2019
Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
By David Berger, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra
NBER Monetary Economics Meeting, Nov 2018
State Dependency of Monetary Policy: The Refinancing Channel
By Martin Eichenbaum, Sergio Rebelo, and Arlene Wong
NBER Economic Fluctuations and Growth Meeting, Oct 2018
Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices
By Deeksha Gupta
Tepper-LAEF Conference, Sep 2018
Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and its Aftermath
By Antonio Falato, Giovanni Favara, and David Scharfstein
SFS Cavalcade, May 2018
Anatomy of Corporate Borrowing Constraints
By Chen Lian and Yueran Ma
NBER Monetary Economics Meeting, Mar 2018
Color and Credit: Race, Regulation, and the Quality of Financial Services
By Taylor Begley and Amiyatosh Purnanandam
UNC Junior Faculty Roundtable, Dec 2017
An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts
By Tomasz Piskorski and Alexei Tchistyi
10th Macro Finance Society Workshop, Boston, Nov 2017
Regulating Household Leverage
By Anthony DeFusco, Stephanie Johnson, and John Mondragon
Housing: Micro Data, Macro Problems. Bank of England, Jun 2017
The Equity Premium and the One Percent
by Alexis Toda and Kieran Walsh
AFA Annual Meeting, Chicago, Jan 2017
Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
by Martin Floden, Matilda Kilstrom, Josef Sigurdsson, and Roine Vestman
AEA Annual Meeting, Chicago, Jan 2017
Regional Heterogeneity and Monetary Policy
by Martin Beraja, Andreas Fuster, Erik Hurst, and Joseph Vavra
AEA Annual Meeting, Chicago, Jan 2017