Labor Market and Regional Reallocation Effects of Housing Busts (Job Market Paper)
The present paper studies the impact of a housing bust on regional labor reallocation and the labor market. I document a novel empirical fact, which suggests that, by increasing the fraction of households with negative housing equity, a housing bust hinders interregional mobility. I then study a multi-region economy with local labor and housing markets and worker reallocation. The model can account for the positive co-movement of relative house prices and unemployment with gross out-migration and negative co-movement with in-migration observed in the cross section of states. A housing bust creates debt overhang for some workers, which distorts their migration decisions and increases aggregate unemployment in the economy. This adverse effect is amplified when regional slumps are particularly deep as in the recent U.S. recession. In a calibrated version of the model, I find that the regional reallocation effect of the housing bust can account for between 0.2 and 0.5 percentage points of aggregate unemployment and 0.4 and 1.2 percentage points of unemployment in metropolitan areas experiencing deep local recessions in 2010. Finally, I study the labor market effects of two policies proposed for addressing the U.S. mortgage crisis.
Endogenous Debt Capacity and Asset Prices – an Investment Quality Channel
This paper develops a model of endogenous fluctuations in credit market conditions. I consider an economy with productivity heterogeneity and durable capital. Entrepreneurs issue debt to buy capital but have superior information about the distribution of their future productivity and hence of their debt repayments. Additionally, limited pledgeability of high output realizations creates a wedge between the valuations of inside and outside investors. The combination of these two frictions leads to a new channel of interaction between the price of capital and the credit market that operates through a complementarity in lenders' debt purchase decisions. A lender's decision to purchase high or low face value debt affects the price of capital by affecting entrepreneurs' debt capacity. On the other hand, the price of capital affects the quality of investment and, consequently, expected debt repayments. The complementarity leads to multiple equilibria. In one equilibrium the price of capital is high, equilibrium leverage is high and capital is reallocated from less productive to more productive entrepreneurs. In the other, capital reallocation is depressed, the price of capital is low and so is equilibrium leverage. I then use the model to analyze the effect of unconventional monetary policy by a central bank. In this environment, an intervention similar to the TALF improves credit market conditions and increases aggregate output.
Research in Progress
Signaling and Coordination Aspects of Banks' Recapitalization Decisions
During the initial stages of the recent financial crisis, banks collectively delayed their decisions to recapitalize and preferred costly asset liquidation to new equity issuance. The present work proposes an explanation for delayed recapitalization. In the model economy, banks may experience an aggregate liquidity shock, which outside investors are uninformed about ex ante. Banks can collectively convey information to investors about the size of the shock through their decision to recapitalize. However, they face a coordination problem: when only few banks seek recapitalization the market interprets recapitalization needs as a signal of low portfolio quality. In contrast, when a majority of banks acts simultaneously, outside investors update their beliefs about the realization of the aggregate shock and consequently the decision to recapitalize is not taken as a signal of low portfolio quality. In this model, the coordination problem arises from an informational externality that banks fail to internalize when choosing whether to recapitalize.