Working Papers
Unemployment Insurance and Macro-financial (In)Stability
with Yavuz Arslan, Ahmet Degerli, Bulent Guler, and Burhan Kuruscu
We identify and study two mechanisms that can overturn the stabilizing effects of unemployment insurance (UI) policies. First, households in economies with more generous UI reduce their precautionary savings and borrow more in the mortgage market. Second, the overall share of mortgages as well as the share of mortgages with higher loan-to-income ratios on bank balance sheets increase. As a result, both bank and household balance sheets become more vulnerable to adverse shocks, which deepens recessions. We demonstrate the importance of these channels by employing a quantitative heterogeneous-agent general equilibrium model and by providing county-level empirical evidence from the U.S. housing and mortgage markets.
“There is No Planet B”, but for Banks There are “Countries B to Z”: Domestic Climate Policy and Cross-Border Lending
with Emanuela Benincasa and Steven Ongena
We document that banks react to domestic climate policy stringency by increasing cross-border lending. We use loan fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with a race to the bottom, the positive effect increases as the borrower country becomes less stringent and is absent if the borrower country is more stringent. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply to high-risk borrowers abroad. Our results suggest that cross-border lending enables lenders to exploit the lack of global coordination in climate policies.
The Price of Leverage: Learning from the Effect of LTV Constraints on Job Search and Wages
with Kasper Roszbach
Does households' leverage matter for their job search, matching in the labor market, and wages? To answer this question we exploit a loan-to-value ratio restriction in Norway that exogenously reduces household leverage and a sample of displaced workers who lost their jobs due to mass layoffs. We find that a reduction in leverage improves the starting wages of displaced workers. Lower leverage allows workers to prolong their unemployment duration, find jobs in higher paying firms, and switch into new occupations and industries. The positive effects are long-lasting and more pronounced for young and higher educated workers. Our results indicate that policies aimed at limiting households' leverage have the potential to substantially improve their labor market outcomes by reducing the frictions that leverage creates in the job search.
Publications
Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks
with Yavuz Arslan and Ahmet Degerli, Management Science
We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their precautionary savings. Since deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies squeeze their small business lending. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.
Population Aging and Bank Risk-Taking
with Sebastian Doerr and Steven Ongena, Journal of Financial and Quantitative Analysis
Does population aging affect bank lending? To answer this question we exploit geographic variation in population aging across U.S. counties to provide the first evidence on its impact on bank risk-taking. We find that banks more exposed to aging counties experience deposit inflows due to seniors' higher savings rate. They consequently extend more credit, but relax lending standards: Loan-to-income ratios increase and application rejection rates decline. Exposed banks also see a sharper rise in nonperforming loans during downturns, suggesting that population aging may lead to financial instability. These results are in line with an increase in savings and a decline in investment opportunities induced by population aging.
In Progress
Available upon request