Financial crisis are often associated with an endogenous credit reversal followed by a fall in as... more Financial crisis are often associated with an endogenous credit reversal followed by a fall in asset prices and failures of …nancial institutions. To account for this sequence of events, this paper constructs a model where the excess risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, Economic Journal, 2000), and where the supply of credit to these investors is endogenous. First, we show that changes in the composition and riskiness of investors'portfolio as total lending varies may cause the ex ante return on loans to increase with the amount of total lending, thereby creating the potential for multiple (Pareto-ranked) equilibria associated with di¤erent levels of lending, asset prices, and output. We then embed this mechanism into a 3-period model where the low-lending equilibrium is selected with positive probability at the intermediate date. This event is associated with a ine¢ cient liquidity dry-up, a market crash, and wid...
This paper explores the effects of shifts in interest rates on corporate leverage and default in ... more This paper explores the effects of shifts in interest rates on corporate leverage and default in the context of a dynamic model in which the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival. The need to finance new investment pushes firms ’ leverage ratio above some state-contingent target towards which firms gradually adjust through earnings retention. The response to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms. Our results helps rationalize some of the evidence regarding the risk-taking channel of monetary policy.
Chemla for their comments and suggestions. All remaining errors are ours. 1 Abstract: Financial c... more Chemla for their comments and suggestions. All remaining errors are ours. 1 Abstract: Financial crises are often associated with an endogenous credit reversal, followed by a fall in asset prices and serious disruptions in the …nancial sector. To account for this sequence of events, this paper constructs a model where excessive risk-taking by investors leads to a bubble in asset prices, and where the supply of credit to these investors is endogenous. We show that the interplay between excessive risk-taking and the endogeneity of credit may give rise to multiple equilibria associated with di¤erent levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an ine ¢ cient liquidity dry-up, a market crash, and widespread failures by borrowers. The possibility of multiple equilibria and self-ful…lling crises is shown to be related to the severity of the risk-shifting
This paper presents a model where uninsurable income shocks and credit constraints generate a dem... more This paper presents a model where uninsurable income shocks and credit constraints generate a demand for liquidity. Infinitely lived agents purchase a risky asset to self insure themselves against their individual risk. They also trade call options to diversify the aggregate risk they face. In this economy, options are not redundant but complete the market for aggregate risk. We are able to characterize analytically both equilibrium prices and quantities of the underlying asset and associated options. The underlying asset volatility affects the prices and the traded volume of options, consistently with empirical findings. In addition, the introduction of options completing the market increases the ex ante welfare and decreases inequalities across agents.
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing major positive labor supply shock. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of aging and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. For instance, it accounts for as much as -1% of wage inflation per annum in Germany since 2013. Our second result is that Phillips curves are alive and well. Wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
Highlights Fully-fledged federations assign fiscal policy stabilisation largely to the federal le... more Highlights Fully-fledged federations assign fiscal policy stabilisation largely to the federal level, based on a relatively large budget. In the euro area, a large federal budget is unrealistic at the current level of political and societal integration, and fiscal stabilisation will continue to rely mainly on national policies. For aggregate fiscal policy to become more stabilising with respect to the economic cycle, while achieving long-term sustainability, it is necessary (i) to avoid imposing self-defeating fiscal adjustments on crisis countries by making sovereign debt restructuring a real possibility (which involves strengthening the banking sector and extending the remit of the European Stability Mechanism); (ii) to task the planned independent European Fiscal Board with delineating exceptional times during which fiscal coordination is needed on top of monetary policy; (iii) to make national fiscal policies more stabilising by allowing incremental investment and unemployment s...
Comparative Political Economy: Monetary Policy eJournal, 2019
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
We study an economy where infinitely living agents face uninsurable shocks and are allowed defaul... more We study an economy where infinitely living agents face uninsurable shocks and are allowed default on their debt. After having defaulted, agents are excluded from the economy. We present a equilibrium definition allowing for both credit constraints and default inequilibrium. Indeed, existing theories introduce either default of credit constraint in general equilibrium, but never both. We prove that the optimal allocation includes both credit constraints and default, while the market allocation is associated with too much credit and too many default in equilibrium.
We present a simple theory of business cycle movements of derivative asset prices and volumes. Th... more We present a simple theory of business cycle movements of derivative asset prices and volumes. This theory relies on time-varying heterogeneity among agents in their demand for insurance against aggregate risk. Formally, we build an infinite horizon model in which agents face an aggregate risk, but also dierent levels of idiosyncratic risk. We are able to analytically characterize a general
Financial crisis are often associated with an endogenous credit reversal followed by a fall in as... more Financial crisis are often associated with an endogenous credit reversal followed by a fall in asset prices and failures of …nancial institutions. To account for this sequence of events, this paper constructs a model where the excess risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, Economic Journal, 2000), and where the supply of credit to these investors is endogenous. First, we show that changes in the composition and riskiness of investors'portfolio as total lending varies may cause the ex ante return on loans to increase with the amount of total lending, thereby creating the potential for multiple (Pareto-ranked) equilibria associated with di¤erent levels of lending, asset prices, and output. We then embed this mechanism into a 3-period model where the low-lending equilibrium is selected with positive probability at the intermediate date. This event is associated with a ine¢ cient liquidity dry-up, a market crash, and wid...
This paper explores the effects of shifts in interest rates on corporate leverage and default in ... more This paper explores the effects of shifts in interest rates on corporate leverage and default in the context of a dynamic model in which the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival. The need to finance new investment pushes firms ’ leverage ratio above some state-contingent target towards which firms gradually adjust through earnings retention. The response to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms. Our results helps rationalize some of the evidence regarding the risk-taking channel of monetary policy.
Chemla for their comments and suggestions. All remaining errors are ours. 1 Abstract: Financial c... more Chemla for their comments and suggestions. All remaining errors are ours. 1 Abstract: Financial crises are often associated with an endogenous credit reversal, followed by a fall in asset prices and serious disruptions in the …nancial sector. To account for this sequence of events, this paper constructs a model where excessive risk-taking by investors leads to a bubble in asset prices, and where the supply of credit to these investors is endogenous. We show that the interplay between excessive risk-taking and the endogeneity of credit may give rise to multiple equilibria associated with di¤erent levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an ine ¢ cient liquidity dry-up, a market crash, and widespread failures by borrowers. The possibility of multiple equilibria and self-ful…lling crises is shown to be related to the severity of the risk-shifting
This paper presents a model where uninsurable income shocks and credit constraints generate a dem... more This paper presents a model where uninsurable income shocks and credit constraints generate a demand for liquidity. Infinitely lived agents purchase a risky asset to self insure themselves against their individual risk. They also trade call options to diversify the aggregate risk they face. In this economy, options are not redundant but complete the market for aggregate risk. We are able to characterize analytically both equilibrium prices and quantities of the underlying asset and associated options. The underlying asset volatility affects the prices and the traded volume of options, consistently with empirical findings. In addition, the introduction of options completing the market increases the ex ante welfare and decreases inequalities across agents.
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing major positive labor supply shock. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of aging and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. For instance, it accounts for as much as -1% of wage inflation per annum in Germany since 2013. Our second result is that Phillips curves are alive and well. Wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
Highlights Fully-fledged federations assign fiscal policy stabilisation largely to the federal le... more Highlights Fully-fledged federations assign fiscal policy stabilisation largely to the federal level, based on a relatively large budget. In the euro area, a large federal budget is unrealistic at the current level of political and societal integration, and fiscal stabilisation will continue to rely mainly on national policies. For aggregate fiscal policy to become more stabilising with respect to the economic cycle, while achieving long-term sustainability, it is necessary (i) to avoid imposing self-defeating fiscal adjustments on crisis countries by making sovereign debt restructuring a real possibility (which involves strengthening the banking sector and extending the remit of the European Stability Mechanism); (ii) to task the planned independent European Fiscal Board with delineating exceptional times during which fiscal coordination is needed on top of monetary policy; (iii) to make national fiscal policies more stabilising by allowing incremental investment and unemployment s...
Comparative Political Economy: Monetary Policy eJournal, 2019
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show tha... more Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
We study an economy where infinitely living agents face uninsurable shocks and are allowed defaul... more We study an economy where infinitely living agents face uninsurable shocks and are allowed default on their debt. After having defaulted, agents are excluded from the economy. We present a equilibrium definition allowing for both credit constraints and default inequilibrium. Indeed, existing theories introduce either default of credit constraint in general equilibrium, but never both. We prove that the optimal allocation includes both credit constraints and default, while the market allocation is associated with too much credit and too many default in equilibrium.
We present a simple theory of business cycle movements of derivative asset prices and volumes. Th... more We present a simple theory of business cycle movements of derivative asset prices and volumes. This theory relies on time-varying heterogeneity among agents in their demand for insurance against aggregate risk. Formally, we build an infinite horizon model in which agents face an aggregate risk, but also dierent levels of idiosyncratic risk. We are able to analytically characterize a general
Uploads