University of Notre Dame
Department of Economics
3033 Jenkins Nanovic Hall
Notre Dame, IN 46556
“Borrowing to Save and Investment Dynamics” (updated December 2018)
Existing literature on financial frictions argue that firms reduce investment in a crisis due to a lack of credit. However, U.S. public firms, which together accounted for 89 percent of the decline in investment during the Great Recession, experienced no drop in borrowing. Instead of investing, they borrowed to expand 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. In a quantitative general equilibrium model with heterogeneous firms, I show that this mechanism can simultaneously generate a sharp downturn and a slow recovery.
“The Behavioral Financial Accelerator” with Antonio Falato (updated June 2019)
Risk premia in debt markets are wide, volatile, and forecast real macroeconomic outcomes. We develop a unified quantitative account of these facts based on information frictions in debt markets. Our key mechanism is that debt investors form beliefs about firms’ creditworthiness by “following the herd” – i.e., using publicly-available information on quarter-ahead corporate profits from surveys of professional forecasters. Via this herding mechanism, biases in expectations transmit to debt prices and the macroeconomy. We show that informational inefficiencies are critical to understand large volatility episodes in debt markets and their consequences for the macroeconomy.