We study a model in which leverage and compensation are both choice variables for the firm and borrowing spreads are endogenous. First, we analyze the correlation between leverage and variable compensation. We show that allowing for both endogenous compensation and leverage fully rationalizes...

We show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions. This mechanism can account for up to 40% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and...

I show that both before and after the Great Recession, housing dynamics strongly correlate with current account dynamics, both across and within countries. In a benchmark DSGE model of housing markets, housing price-to-rent ratios are counterfactual if the transmission channel from housing to...

Changes in country-specific aggregate volatility are positively correlated with the current account but negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can...

We analyze banking crises and lending of last resort (LOLR) in a quantitative model of financial frictions with bank defaults. LOLR policies generate a tradeoff between financial fragility (due to more highly leveraged banks) and milder crises since the policies are effective once in a crisis....

This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’...