The Amplification Effects of Adverse Selection in Mortgage Credit Supply
Journal of Housing Economics (2023)
SUERF The European Money and Finance Forum, Policy Brief
Working Paper Banco de España, here.
This paper studies how information frictions in the securitization market amplify the response of mortgage credit supply to house price shocks. Securitization prices and quantities endogenously result from an optimal contracting problem between investors and banks. Banks are better informed than investors about the quality of mortgages they originate, leading to adverse selection in securitization. Investors use the quantity sold as a screening device to induce banks to reveal truthful information. We find that adverse selection amplifies the response of a bank’s mortgage credit to house price shocks. The degree of amplification is also a function of the technological differences in managing portfolios between banks and investors. The model is informative on how information frictions can induce large fluctuations in mortgage credit supply.
Revista Compendium. Cuadernos de Economia y Administración (2016)
How efficient are countercyclical fiscal rules? I study the role of countercyclical fiscal rules, for small and open commodity-exporting economies, in stabilizing output and real exchange rate fluctuations. I propose a fiscal expenditure rule based on a country’s output gap, and on the commodity-price gap, along the lines of the Chilean structural fiscal rule launched in 2001. My framework encompasses the Chilean rule, in which government expenditure is acyclical, by covering alternatives that allow for explicit countercyclical expenditure. I embed the proposed rule in a small-open-economy DSGE model calibrated to match key features of the Chilean economy. I find that the proposed rule can reduce output volatility by one-third and real exchange rate volatility by 10 percentages compared to a benchmark scenario in which fiscal expenditure is acyclical.
Mortgage Securitization and Information Frictions in General Equilibrium [Paper]
2022 Working Paper Banco de España. Summary Research Feature
2021 runner-up best paper of the XXVI meeting of Central Bank Research Network by CEMLA
2019 Winner of the AREUEA Homer Hoyt Doctoral Dissertation Award
We develop a model of the U.S. housing finance system that delivers an equilibrium connection between the securitization and mortgage credit markets. An endogenous securitization market efficiently reallocates illiquid assets, increases liquidity to fund mortgage lending, and lowers mortgage rates for households. However, its benefits are hindered by originators' private information about loan quality which leads to adverse selection in securitization. Fluctuations in household credit risk induce expansion and contractions of mortgage credit through the securitization liquidity channel. Adverse selection generates a multiplier effect of household shocks. Applying the model to the Great Financial Crisis, we quantify that information frictions amplified the observed mortgage credit contraction by 1.7 times. The multiplier is an endogenous function of the severity of information frictions. Our assessment of the post-GFC economy indicates that credit guarantees in the securitization market have contributed to reducing the volatility of quantities and prices in the credit and securitization markets, along with the probability of market collapses. We provide insights into the benefits and drawbacks of credit guarantees as a stabilization instrument.
Climate Transition Risk and The Role of Bank Capital Regulation [SSRN Paper]
joint with Enric Martorell
Revise & Resubmit at Economic Modelling.
Presentations: Malta - 2023 Dynare Conference, Montpellier - 2023 International Conference in Finance, Banking and Accounting (ICFBA), Paris - Bank the France, 2023 Green Finance Research Advances Conference (Upcoming).
How should capital requirements be set to deal with climate-related transition risks? We assess the role of bank capital regulation in mitigating carbon tax spillovers into the financial sector employing a general equilibrium macro-finance model. Production in our model requires intermediate, fossil, and clean energy inputs. The banking sector provides specialized credit to each intermediate industry and is subject to standard limited liability frictions. In the medium run, higher capital requirements on banks' fossil exposures are welfare superior to general capital requirements and indirectly support a green credit transition. The economy's capacity to substitute fossil for low-carbon energy production inputs determines the complementarity between bank capital regulation and carbon tax policies in supporting a green credit transition. Our transitional dynamics analysis indicates that increasing fossil capital requirements to their optimal medium-run level delivers long-run welfare gains at the expense of short-run losses.
Work in Progress
On the Interactions between Monetary and Macroprudential Policies
joint with Jorge Abad, Hervé Le Bihan, Joel Marbet and Galo Nuño
Wedges: Taxes vs Policies. A cross-country analysis
joint with Paulina Restrepo-Echavarria, Lee Ohanian, Mark Wright
Using a novel panel data set of tax variables for all states in the U.S. we document that the average corporate income tax rate has declined by approximately 40\% from 1980 to 2016. At the same time, we observe that most states have gradually shifted towards imposing a sales-only apportionment weight on multi-state firms. We ask whether these patterns are consistent with states competing in setting their corporate tax policy. Empirically, we find evidence of strategic interaction in setting tax policies between neighboring states. Theoretically, we show that moving towards a sales-only apportionment scheme is consistent with the prediction of a dynamic general equilibrium model of tax competition that incorporates the Formula Apportionment rule.