Essays in macroeconomics and finance

Abstract

The first chapter proposes a model of booms and busts in housing and non-housing consumption driven by the interplay between relatively low interest rates and an expansion of credit, triggered by further decline in interest rates and relaxing collateral requirements. When credit becomes available, households would like to borrow in order to frontload consumption, and this increases demand for housing and non-housing consumption. If the increase in the demand for housing translates into an increase in prices, then credit is fueled further, this time endogenously, because of the role of housing as collateral. Because a lifetime budget constraint still applies, even in the absence of a financial crisis, the initial expansion in housing and non-housing consumption will be followed by a period of contraction, with declining consumption and house prices. My mechanism clarifies that boom-bust dynamics will be accentuated in regions with inelastic supply of housing and muted in elastic regions. In line with qualitative predictions of my model, I provide evidence that differences in regions' elasticity of housing and initial relaxation of collateral constraints can explain most of the 2000-2006 boom and the subsequent bust in house prices and consumption across US counties. The second chapter (co-authored with Daron Acemoglu, Simon Johnson, James Kwak and Todd Mitton) studies the value of political connections during turbulent times and shows the announcement of Tim Geithner as President-elect Obamas nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a personal connection. This return was around 15 percent from day 0 through day 10, relative to other comparable financial firms. This result holds across a range of robustness checks and regardless of whether we measure connections in terms of meetings he had in 2007-08, non-profit board memberships he shared with financial services executives, or firms with headquarters in New York City. There were subsequently abnormal negative returns for connected firms when news broke that Geithners conrmation might be derailed by tax issues. We argue that this value of connections reflects the perceived impact of relying on the advice of a small network of financial sector executives during a time of acute crisis and heightened policy discretion. The third chapter (co-authored with Adam Ashcraft and Kunal Gooriah) studies the impact of skin-in-the game on the performance of securitized assets using evidence from conduit commercial mortgage backed securities (CMBS) market. A unique feature of this market is that an informed investor purchases the bottom 5 percent of the capital structure, known as the B-piece, conducting independent screening of loans from which all other investors benefit. However, during the recent credit boom, a secondary market for B-pieces developed, permitting these investors to significantly reduce their skin in the game. In this paper, we document, that after controlling for all information available at issue, the percentage of the B-piece that is sold by these investors has a significant adverse impact on the probability that more senior tranches ultimately default. The result is robust to the use of an instrumental variables strategy which relies on the greater ability of larger B-piece buyers to to sell these positions given the need for large pools of collateral. Moreover we show the risk associated with this agency problem was not priced.