Research

CV

Back to main page

Published/Forthcoming Papers (links are to working paper versions)

Link to Economist Article about the paper

(Financial System Risk and Flight to Quality (joint with R. Caballero) [OLDER VERSION, WITH DYNAMIC MODEL] )

                Link to Bernanke, et al, G20 speech and paper that cites this paper. Link

FINANCIAL SECTOR LEVERAGE DATA: Our model predicts that leverage of the financial sector rises during crises, rather than falls as would be consistent with a deleveraging model.  This short note explains why this happens in our model and presents empirical evidence that proves the data is consistent with the model. It also explains the empirical deleveraging pattern that other models have focused on. 

Link to Economist Article about the paper


Short-term Debt and Financial Crises: What we can learn from U.S. Treasury Supply (joing with A. Vissing-Jorgensen)  

We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the non-financial sector. Households' demand for safe and liquid assets drives a premium on such assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against these assets. The central prediction of the theory is that government debt should be a substitute for the net supply of privately issued short-term debt. We verify this prediction with data from 1914 to 2011 by showing the net supply of government debt, predominantly Treasuries, is strongly negatively correlated with the net supply of private short-term debt, defined to be the private supply of short-term safe and liquid debt, net of the financial sector's holdings of Treasuries (and reserves and currency). A second set of predictions of the model concern the quantity of money (i.e. liquid bank liabilities such as checking accounts). The theory predicts that when government supply is large, banks should hold more of the supply and use it to back issuance of more liquid bank liabilities. We confirm this prediction as well. Moreover, we show that accounting for the impact of Treasury supply on bank money results in a stable estimate for money demand and can help resolve the "missing money" puzzle of the post-1980 period. Finally, the theory predicts that the quantity of short-term debt issued by the financial sector should predict financial crises better than standard measures such as private credit/GDP. We also confirm this prediction.

Slides


A Macroeconomic Framework for Quantifying Systemic Risk (joint with Z. He)

(Winter of 2012 Swiss Finance Institute Outstanding Paper Award)

Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model's solution is a stochastic steady state in which only some of the states correspond to systemic risk states. This model allows us to examine the transition from ``normal" states to systemic risk states. We calibrate our model and use itto match the systemic risk apparent during the 2007/2008 financial crisis.

Slides

Sizing up Repo (with Stefan Nagel and Dmitry Orlov) 

We measure the repo funding extended by money market funds and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates sorted by the type of underlying collateral. Both the quantity and price data suggest that there was a run on repo backed by non-Agency MBS/ABS collateral.  However, to gauge the consequences of such a run one must also take into account that prior to the financial crisis only about 3% of outstanding non-Agency MBS/ABS is financed with repo from money market funds and securities lenders. The contraction in the quantity of repo funding of non-Agency MBS/ABS during the financial crisis is an order of magnitude smaller than the contraction in short-term funding through asset-backed commercial paper and direct holdings of securitized assets by money market funds and securities lenders. The repo market for Treasury and Agency collateral functioned near-normally during the crisis. While the contraction in aggregate repo funding with non-Agency MBS/ABS was small, dealer banks with a larger exposure to private debt securities were affected more strongly and resorted to the Fed's emergency lending programs for funding.  

Light Reading:

 

Older Papers:

Fiscal Policy and Financial Depth (joint with R. Caballero)

Liquidity Illusion: On the Risks of Sterilization(joint with R. Caballero)

International Liquidity Management: Sterilization Policy in Illiquid Financial Markets(joint with R. Caballero)

[Finance Department] [ Kellogg Home Page ] [ Northwestern University Home Page ]

 

Last Revised: January 25, 2013