Presentation on theme: "Starting observation (ex-post) Eggertsson and Krugman (2012) ─Distributional shocks matter ex-post in the presence of ZLB type of constraints. Series of."— Presentation transcript:
Starting observation (ex-post) Eggertsson and Krugman (2012) ─Distributional shocks matter ex-post in the presence of ZLB type of constraints. Series of papers by Jorda, Taylor and Schularik provide some fascinating historical evidence ─Caution: not clear in the empirical literature that the ZLB is “necessary” ─Possible tension with theory. ─Would be nice to explore other possible frictions Other work
Can monetary policy solve this problem? Not really
Ex-ante decision making Is ex-ante borrowing / lending decision going to incorporate the ex-post (stochastic) macro effects of debt? ─No, there is an “aggregate demand externality” ─d vs. D ─Get inefficient outcome even with complete markets ─Farhi and Werning, Korinek and Simsek
Credit cycles and inequality The discussion has to involve income and wealth inequality as well ─Lenders and borrowers differ systematically ─The paper is agnostic about the “timing” of credit cycles ─But evidence suggests that the “credit cycle” is related to rising inequality ─Could credit cycle be a GE “response” to disequilibriating forces?
Relevant forces outside of model Non-standard preferences ─What if a quarter to one-third of the population was myopic? Fire sale externality ─Equally important Employment feedback
Mandating change? Mandating / subsidizing state-contingent financial contracts that automatically redistribute towards the more constrained agents ex-post Getting rid of the bias induced by capital regulation Getting rid of the bias induced by tax policy Our financial regulation and tax policy makes no sense from a macro stability perspective. ─This paper crystallizes some of the core issues in this debate.
Buying a $200K Home
House Prices Drop 40%
Debt concentrates risk on the debtor – the lender largely escapes unscathed Who are lenders? Debt and inequality naturally connected Concentration of Losses