University of Notre Dame
Department of Economics
3033 Jenkins Nanovic Hall
Notre Dame, IN 46556
“Borrowing to Save and Investment Dynamics”, December 2019.
During the U.S. Great Recession, investment declined more among firms whose indebtedness increased. Instead of investing, they increased their leverage and expanded their stock of safe assets; that is, they borrowed to save. I model borrowing to save as an optimal portfolio choice when firms face gradually resolving uncertainty, balancing the desire to invest with the need to prevent default. Embedding this into a quantitative general equilibrium model with heterogeneous firms, I show that this mechanism can simultaneously generate a sharp downturn and a slow recovery in response to a combination of first- and second-moment shocks.
“The Expectations Driven Financial Accelerator” with Antonio Falato, December 2019.
This paper argues that imperfect information in credit markets is a source of macroeconomic fragility. Using a dynamic model with endogenous default, we highlight a novel mechanism whereby uninformed debt investors learn about ﬁrms’ creditworthiness from publicly-available information on quarter-ahead corporate proﬁts. We show that: 1) short-term changes in expectations of corporate proﬁts forecast credit spreads and investment up to two years ahead both in the aggregate and at the ﬁrm level; 2) spreads and defaults are counter-cyclical; 3) the mechanism can account quantitatively for the historically large spike in spreads and contraction in aggregate investment during the crisis.
Work in Progress
“Biased Bank Expectations: Micro Evidence and Macro Consequences” with Antonio Falato. (Working paper soon)
We examine banks’ expectations about the future performance of their loan portfolios, how they are formed and whether they matter for lending decisions. We construct a novel micro dataset on bank expectations using bank-level responses to a set of special questions in the Senior Loan Officer Opinion Survey on Bank Lending Practices for an annual panel of about one hundred U.S. banks between 2006 and 2019. Our first contribution is to document stylized facts on banks’ expectations and behavioral biases, as measured by the systematic forecast errors made by the banks. Our second contribution is to quantify the macroeconomic implications of the forecasting bias, by developing a dynamic equilibrium model with distorted bank expectations.