Using transaction-level data from the Korean tri-party repo market, we study how repo contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing evidence. Conditional on collateral quality, however, we find a trade-off: a one-percentage-point increase in the spread is associated with a 1.3-percentage-point reduction in the haircut. The same increase in the interest rate is associated with a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance against default becomes more valuable as default risk rises. We show that the interaction between lenders’ incentives to acquire information and borrowers’ opportunistic default risk explains both the positive unconditional relationship and the negative conditional relationship between haircuts and interest rates.
We provide a theorem on the role of risk and risk attitudes in macroeconomic models that clarifies and extends the Tallarini (2000) separation result. Under (1) separation of intertemporal and risk preferences, (2) separation of drivers of first and higher moments in the model primitives, and (3) approximate linearity of constraints, risk aversion and time-varying risk are irrelevant for the elasticity of any endogenous variable with respect to state variables that don’t drive variation in higher moments. We discuss how models generate a more prominent role for risk by “breaking” or “adapting” to the assumptions in the theorem.
ABSTRACT This paper provides novel empirical evidence that cash‐rich firms have higher equity payouts and higher stock prices in response to expansionary monetary policy surprises. Stock prices rise despite weak cash‐flow, investment, and credit responses to monetary policy. I rationalize the empirical evidence in a heterogeneous‐firm New Keynesian model where firms finance investment with cash and equity issuance. Monetary easing weakens precautionary cash demand, leading cash‐rich firms to optimally allocate excess funds to shareholders. Since payouts are procyclical, cash‐rich firms earn higher returns in expansionary periods. My findings highlight a payout channel through which monetary policy impacts asset prices.
ABSTRACT We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous‐agents model with two main ingredients: (i) rare disasters and (ii) heterogeneous beliefs. The model captures time‐varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In quantitative analysis, we find that this channel can account for a large fraction of the transmission to aggregate consumption.
This paper develops a macroeconomic model that combines an incomplete‐markets overlapping‐generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non‐employed workers, and differences in match quality. With these ingredients, our model provides a joint microfoundation for the three main inputs in aggregate production: capital, employment, and labor efficiency. The calibrated model offers a good fit to the empirical age profiles of search activity, job‐finding rates, wages, and savings. We use the model to analyze the impact of tax and transfer policies for labor market dynamics and aggregate economic activity via capital, employment, and labor efficiency channels. Lower unemployment benefits and a less progressive tax schedule bring about welfare losses for a newborn worker which are mainly driven by higher consumption risk and costlier search effort; both policies have differential effects along the age, income, and wealth dimensions.
Fiscal costs of excessive debt should be assessed dynamically reflecting anticipated growth, deficits, and interest rates. Studying their joint behavior, with overlapping generations and structural deficits arising from social security, we define government debt capacity as the level that can be just sustained with current fiscal parameters unchanged all the way to an unstable steady state, in which primary deficits last forever. Below capacity, debt converges to a stable steady state. Above capacity, debt unravels. Exceeding capacity without unraveling requires higher future taxes or reduced expenditures, which is the true fiscal cost. With money, capacity increases with the target nominal interest rate if the Taylor coefficient is below one. Increasing capacity by subsidizing innovation is challenging as benefits hardly surpass costs. This paper was accepted by Lukas Schmid, finance. Funding: P. Ehling acknowledges support of the Centre for Advanced Study in Oslo, Norway, which funded and hosted his research project (Asset Pricing with Heterogeneous Investors in Overlapping Generations) during the 2024/25 academic year. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.06528 .