https://eml.berkeley.edu/~webfac/gorodnichenko/gertler.pdf

A model of unconventional monetary policy

We develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. We use the framework to address two issues in particular: first, how disruptions in financial intermediation can induce a crisis that affects real activity; and second, how various credit market interventions by the central bank and the Treasury of the type we have seen recently, might work to mitigate the crisis. We make use of earlier literature to develop our framework and characterize how very recent literature is incorporating insights from the crisis.

/pdf/financial-intermediation-and-credit-policy-in-business-cycle-4jebeme7xo.pdf

Financial Intermediation and Credit Policy in Business Cycle Analysis

http://www3.tcmb.gov.tr/konferanslar/fsr/Sherman.pdf

Econometric measures of connectedness and systemic risk in the finance and insurance sectors

lapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5–7 cents with substantial heterogeneity across ZIP codes. ZIP codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, ZIP codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009. JEL Codes: E21, E32, E44, E60.

/pdf/household-balance-sheets-consumption-and-the-economic-slump-4xo9n6fpzz.pdf

Household Balance Sheets, Consumption, and the Economic Slump*

We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2500504_code1428438.pdf?abstractid=2207439&mirid=5&type=2

Systemic Risk and Stability in Financial Networks

Since 2010, U.S. GDP growth has been anemic, averaging 2.1% a year, and this despite interest rates very close to zero. Historically, one would have expected such low sustained rates to lead to much stronger demand. They have not. For some time, one could point to plausible culprits, from a weak financial system to fiscal consolidation. But, as time passed, the financial system strengthened, fiscal consolidation came to an end, and still growth did not pick up. We argue that this is due, in large part, not to legacies of the past but to lower optimism about the future, more specifically to downward revisions in forecast potential growth. Put simply, the anticipation of a less bright future is leading to temporarily weaker demand. If our explanation is correct, it has important implications for policy and for forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates may be partly temporary.

Short-run effects of lower productivity growth.A twist on the secular stagnation hypothesis

Modern macroeconomic models with a financial accelerator mechanism are built around two main ingredients: a collateral constraint and incomplete financial markets. The first ingredient implies that shocks affecting the balance sheet of productive agents propagate to the rest of the economy, while the second ingredient guarantees that agents cannot "hedge" these shocks. The commonly held view in the literature is that both ingredients are necessary for financial amplification. In this paper we revisit this view. We study a neoclassical model where risk averse entrepreneurs and households can trade a full set of Arrow securities, subject to a collateral constraint for entrepreneurs. We first show that, because of general equilibrium spillovers, the competitive equilibrium does not feature "perfect hedging" for entrepreneurs. Indeed, states of the world in which entrepreneurial net worth is low and the collateral constraint binds are also states in which households' income and consumption are low. Because households are risk averse, insuring those states requires a risk premium in equilibrium, a force that limits the ex-ante incentives of entrepreneurs to hedge. Numerical simulations show that this force is quantitatively relevant, as under plausible calibrations the competitive equilibrium with complete markets features the same degree of financial amplification as the one with incomplete markets. A social planner facing the same frictions can improve on the competitive equilibrium by subsidizing entrepreneurial savings toward bad states of the world.

Risk Sharing and Financial Amplification

Recent empirical work shows large consumption responses to house price movements. Can consumption theory explain these responses? We consider a variety of consumption models with uninsurable income risk and show that consumption responses to permanent house price shocks can be approximated by a simple “sufficient-statistic” formula: the marginal propensity to consume out of temporary income times the value of housing. Calibrated versions of the models generate house price effects that are both large and sensitive to the level of household debt in the economy. We apply our formula to micro data to provide a new measure of house price effects.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

House Prices and Consumer Spending

Essays on liquidity in macroeconomics

When ﬁrms and workers disagree on the relative price of labor and goods, they try to outpace each other in setting nominal wages and prices, and inﬂation follows. This mechanism is at work in a standard new Keynesian model, where the degree of disagreement is tied to the distance of aggregate output from its natural level. We look at how different shocks translate into different degrees of inﬂationary pressure on the good market and on the labor market side of the model. Depending on the relative force of these pressures, real wages can increase or fall. The direction in which the real wage moves is not indicative of how powerful the wage price spiral is. If the economy features a scarce non-labor input, inelastically supplied, with a relatively ﬂexible price, episodes of excess demand are characterized by an initial spike in the input price, followed by persistent price inﬂation, and by a smaller but more persistent increase in wage inﬂation. The real wage falls early on and recovers later. In response to a supply shock optimal policy may involve choosing a positive output gap, if it helps relieve negative pressure on nominal wages.

Guido Lorenzoni

Papers

Short-run effects of lower productivity growth.A twist on the secular stagnation hypothesis

Risk Sharing and Financial Amplification

House Prices and Consumer Spending

Essays on liquidity in macroeconomics

Wage Price Spirals *