Banks Adjust Slowly: Evidence and Lessons for Modeling
with Juliane Begenau, Saki Bigio, and Jeremy Majerovitz
This paper presents five facts on the behavior of U.S. banks between 2007 and 2015 that impose useful restrictions on the formulation of a bank problem. (1) Market to book leverage ratio diverged significantly during the crisis. (2) Book values appear to be backward looking. There is more information content about future bank profitability and loan losses in market values than in book values. (3) Neither market nor regulatory constraints are strictly binding for most banks. (4) Banks operate with a target market leverage ratio. (5) The adjustment behavior back to the target changed fundamentally after the crisis. We present a heterogeneous-bank model that rationalizes these facts and can serve as a building block for future work.
The Expenditure Channel of Monetary Policy [new version coming soon]
I study the redistributive effects of monetary policy generated by differences in expenditure choices over goods. Necessities, which feature low expenditure elasticities, and are therefore consumed relatively more by poorer households, have a higher frequency of price adjustments relative to luxuries. I develop a multisector monetary model with incomplete markets to quantify the effects of monetary shocks on consumption for households with different levels of labor income and financial wealth. The model replicates the allocation of expenditure over goods observed in the Consumer Expenditure Survey. Following an expansionary monetary shock, households that are borrowing-constrained and have low labor income experience an increase in consumption 15% lower than the increase predicted by a model that doesn't account for expenditure heterogeneity. This is because they buy goods whose inflation rates respond faster to the shock, and the incompleteness of financial markets precludes intertemporal smoothing for these poorer households.
Work in progress
Asset Pricing with Nonhomothetic Preferences
with Andrés Schneider