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

BUL

CRO

CYP

CZEEST

FRA

GRE

HUN

ICEIRE

ITA

LAT

LIT

MAL

POL

POR

ROM

SLO

SLV

SPA

UK

AUSBELDEN

FIN

GER LUXNET

NOR

SWE

Avg. cons. growth = 0.02

0

.02

.04

.06

.08

.1

Rea

l con

sum

ptio

n gr

owth

(20

02-0

8)

-.2 -.15 -.1 -.05 0 .05 .1 .15 .2

Avg. annual current account deficit/surplus as share of GDP (2002-08)houseofdebt.org, @profsufi & @AtifRMian, Data: Eurostat

Das ist nicht fair

Can monetary policy solve this problem?

• Not really

60

80

100

120

140

2006

= 1

00

01jan2006 01jan2008 01jan2010 01jan2012

S&P 500 Index

Case-Shiller 20 House Price Index

Vanguard Bond Index

houseofdebt.org, @AtifRMian & @profsufi

Asset Prices During Great Recession

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?

Productivity:Output per hour

Median FamilyReal Income

50

100

150

200

U.S

. Pro

duct

ivity

and

Med

ian

Fam

ily I

ncom

e(1

980=

100)

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

houseofdebt.org, @profsufi & @AtifRMian, Data source: BLS, CPS

.8

1

1.2

1.4

1.6

1.8

U.S

. Fed

Gov

t Deb

t and

HH

Deb

t to

GD

P

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

houseofdebt.org, @profsufi & @AtifRMian, Data source: FRED

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.

Your Equity Mortgage$0

$20

$40

$60

$80

$100

$120

Buying a $200K Home

Your Equity Mortgage$0

$20

$40

$60

$80

$100

$120

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

0

.2

.4

.6

.8

1

Poorest 20% 2 3 4 Richest 20%

Leverage Ratio for Homeowners, 2007By Net Worth Quntile

Debt Home equity Financial wealth

The Rich Lend to the Poor

0

10

20

30

$ th

ousa

nds

1992 1995 1998 2001 2004 2007 2010

Poorest 20%

1500

2000

2500

3000

3500

$ th

ousa

nds

1992 1995 1998 2001 2004 2007 2010

Richest 20%

The Distribution of Losses Matters!

0

.005

.01

.015

.02

.025

Mar

gina

l pro

pens

ity to

spe

nd o

n au

tos

out o

f ho

usin

g w

ealth

Income <= 35K 35K to 50K 50K to 100K 100K to 200K 200K < Income

Propensity to spend out of housing wealth, by income

The aggregate demand feedback

The employment feedback

The fire-sale feedback