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I am an Assistant Professor of Finance at the MIT Sloan School of Management. My research focuses on macroeconomics, asset pricing, housing economics and econometrics. CONTACT INFORMATION Email: dlg (at) mit (dot) edu Mailing Address: 100 Main Street, Building E62 Office E62-641 Cambridge, MA 02142 |
WORKING PAPERS
Financial Fragility with SAM? (Updated Mar, 2018; SSRN, Slides)
with Tim Landvoigt and Stijn Van Nieuwerburgh
Abstract: Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. These mortgage contracts are designed to stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired Fintech companies to offer home equity contracts. However, the home owner's gains are the mortgage lender's losses. A general equilibrium model with financial intermediaries who channel savings from saver households 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. The two types of indexation have opposite implications for wealth inequality.
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.
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.
Financial Fragility with SAM? (Updated Mar, 2018; SSRN, Slides)
with Tim Landvoigt and Stijn Van Nieuwerburgh
Abstract: Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. These mortgage contracts are designed to stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired Fintech companies to offer home equity contracts. However, the home owner's gains are the mortgage lender's losses. A general equilibrium model with financial intermediaries who channel savings from saver households 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. The two types of indexation have opposite implications for wealth inequality.
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.
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 (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 (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
Labor-Capital Inequality and the Stock Market
with Sydney C. Ludvigson
Large BVARs with Stochastic Volatility
with Marco Del Negro and Domenico Giannone
Managing a Housing Boom
with Jason Allen
Rental Markets and the Effects of Credit Conditions on House Prices
with Adam Guren
Labor-Capital Inequality and the Stock Market
with Sydney C. Ludvigson
Large BVARs with Stochastic Volatility
with Marco Del Negro and Domenico Giannone
Managing a Housing Boom
with Jason Allen
Rental Markets and the Effects of Credit Conditions on House Prices
with Adam Guren
DISCUSSION SLIDES
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
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