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Starting observation (ex-post)

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

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Starting observation (ex-post)

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  1. 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

  2. Can monetary policy solve this problem? • Not really

  3. 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

  4. 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?

  5. 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

  6. 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.

  7. Buying a $200K Home

  8. House Prices Drop 40%

  9. Concentration of Losses • Debt concentrates risk on the debtor – the lender largely escapes unscathed • Who are lenders? Debt and inequality naturally connected

  10. The Rich Lend to the Poor

  11. The Distribution of Losses Matters!

  12. The aggregate demand feedback

  13. The employment feedback

  14. The fire-sale feedback

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