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
The Rich Lend to the Poor
The Distribution of Losses Matters!
The aggregate demand feedback
The employment feedback
The fire-sale feedback