Publications & Forthcoming

Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market (with M. Giannetti)

Journal of Finance (forthcoming)

We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.

Debt Enforcement, Investment, and Risk Taking Across Countries (with Erwan Morellec, Enrique Schroth and Philip Valta)

Journal of Financial Economics (forthcoming)

We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A difference-in-differences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

American Economic Review 2015, 105(3): 958-992. doi:10.1257/aer.20121416
An exogenous expansion in mortgage credit has significant effects on house prices. This finding is established using US branching deregulations between 1994 and 2005 as instruments for credit. Credit increases for deregulated banks, but not in placebo samples. Such differential responses rule out demand-based explanations, and identify an exogenous credit supply shock. Because of geographic diversification, treated banks expand credit: Housing demand increases, house prices rise, but to a lesser extent in areas with elastic housing supply, where the housing stock increases instead. In an instrumental variable sense, house prices are well explained by the credit expansion induced by deregulation.

House Price Dynamics with Dispersed Information
(with Michael Song)

Journal of Economic Theory 2014, 149(1): 350-382.

We use a user-cost model to study how dispersed information among housing market participants affects the equilibrium house price. In the model, agents are disparately informed about local economic conditions, consume housing services, and speculate on price changes. Information dispersion leads agents to have heterogeneous expectations about housing demand and prices. Optimists, who expect high house price growth, buy in anticipation of capital gains; pessimists, who expect capital losses, prefer to rent. Because of short-selling constraints on housing, pessimistic expectations are not incorporated in the price of owned houses and the equilibrium price is higher and more volatile relative to the benchmark case of common information. We present evidence supporting the model's predictions in a panel of US cities.

Strategic Default and Equity Risk Across Countries (with Enrique Schroth and Philip Valta) 

Journal of Finance, 2012, 67(6): 2051-2095. doi:10.1111/j.1540-6261.2012.01781.x

LECG Prize for Best Conference Paper, EFA Bergen, August 2009

We show that the prospect of a debt renegotiation favorable to shareholders reduces the fi…rm’s' equity risk. The equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for …firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country’'s insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, the equity risk is independent of shareholders' ’incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the …firm’s' equity risk.

Agency Problems and Endogenous Investment Fluctuations 

Review of Financial Studies, 2012, 25(7): 2301-2342. doi:10.1093/rfs/hhs009

This paper proposes a theory of investment fluctuations where the source of the oscillating dynamics is an agency problem between financiers and entrepreneurs. A central tenet of the theory is that investment decisions depend upon entrepreneurs’ initiative to select investment projects ex-ante, and financiers’ incentive to control entrepreneurs ex-post. Too much control discourages entrepreneurial incentive to initiate new investment, while too little control jeopardizes its productivity. This trade-off generates investment dynamics that mimic those of a standard credit frictions model, in which more entrepreneurial net worth leads to higher investment. The same trade-off is capable of generating endogenous reversal of investment booms, induced by an ongoing deterioration of project profitability. Investment fluctuations take place even though no external shocks hit the economy, and even though agents are perfectly rational.

Reconsidering the Role of Money for Output, Prices and Interest Rates (with Paolo Giordani) 

Journal of Monetary Economics, 2009, 56(3): 419-430

New Keynesian models of monetary policy predict no role for monetary aggregates, in the sense that the level of output, prices, and interest rates can be determined without knowledge of the quantity of money. This paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a VAR. Shocks to monetary aggregates are identified by the restrictions suggested by New Keynesian monetary models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.

Other Publications

Externalities and Macro-prudential policy (with Gianni De Nicolo and Lev Ratnovski) also on VOX
Journal of Financial Perspective March 2014 | Volume 2 – Issue 1

As for any form of government intervention, macro-prudential policy should be justified by market failures. This paper discusses three key externalities across financial institutions and from financial institutions to the real economy that rationalize the need for macro-prudential policy: externalities related to strategic complementarities, fire sales and interconnectedness. We link each externality to recently proposed macro-prudential policy tools, and argue that, although various tools can correct the same externality, these tools are best seen as complements rather than substitutes.

Work in Progress

The Granular Origin of Credit Cycles

Capital Requirements and Bank Lending

BHCs' Network Structure and the Transmission of Monetary Policy  

Housing and Non-Housing Consumption

Old Working Papers

An Empirical Reassessment of the Relationship between Finance and Growth


This paper re-examines the empirical relationship between financial development and economic growth. It presents evidence based on an a variety of econometric methods and two standard measures of financial development: the level of liquid liabilities of the banking system and the amount of credit issued to the private sector by banks and other financial institutions. There are two main findings. First, cross section and panel data instrumental variables regressions reveal that financial development and economic growth are correlated but financial development does not cause economic growth. Second, using a procedure appropriately designed to estimate long-run relationships in a panel with heterogeneous slope coefficients, there is evidence that the finance-growth relationship is quite heterogeneous across countries and no clear indication that finance spurs economic growth.