An increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.

We investigate the consumption consequences of the 2006–9 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5–7 cents with substantial heterogeneity across ZIP codes. ZIP codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, ZIP codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.

This study provides a new theoretical result that a decline in the long‐term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for antitrust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.

The well-documented rise in political polarization among the U.S. electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on survey-based measures of economic expectations. Individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party that controls the White House, and this tendency has increased significantly over time. Individuals report a large shift in economic expectations based on partisan affiliation after the 2008 and 2016 elections, but administrative data on spending shows no effect of these shifts on actual household spending.

[We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the Securities and Exchange Commission's filings of all U. S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10% and 20% of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately by a decline in acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making; changes in the management of violating firms suggest that creditors also exert informal influence on corporate governance. Finally, we show that firm operating and stock price performance improve post-violation. We conclude that actions taken by creditors increase the value of the average violating firm.]

We develop a tractable framework for deficit and debt dynamics. A “free lunch” fiscal deficit—one that raises spending without higher future taxes—is sustainable without zero lower bound (ZLB) only when R < G − φ, where φ is the sensitivity of the interest rate to the debt level. With the ZLB, both high and low deficits can increase debt, as the latter weaken demand and reduce nominal growth at the ZLB. A rise in income inequality expands fiscal space outside the ZLB, but contracts it at the ZLB. Calibrating the model, we find little space for “free lunch” policies for the United States in 2019, but significant space for Japan.

We examine the effects of constituents, special interests, and ideology on congressional voting on two of the most significant pieces of legislation in US economic history. Representatives whose constituents experience a sharp increase in mortgage defaults are more likely to support the Foreclosure Prevention Act, especially in competitive districts. Interestingly, representatives are more sensitive to defaults of their own-party constituents. Special interests in the form of higher campaign contributions from the financial industry increase the likelihood of supporting the Emergency Economic Stabilization Act. However, ideologically conservative representatives are less responsive to both constituent and special interests.

Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

From 2007 to 2009, states without a judicial requirement for foreclosures were twice as likely to foreclose on delinquent homeowners. Analysis of borders of states with differing foreclosure laws reveals a discrete jump in foreclosure propensity as one enters nonjudicial states. Using state judicial requirement as an instrument for foreclosures, we show that foreclosures led to a large decline in house prices, residential investment, and consumer demand from 2007 to 2009. As foreclosures subsided from 2011 to 2013, the foreclosure rates in nonjudicial and judicial requirement states converged and we find some evidence of a stronger recovery in nonjudicial states.

Both financing and risk management involve promises to pay that need to be collateralized, resulting in a financing versus risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We show that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time. Risk management drops substantially as airlines approach distress and recovers only slowly after airlines enter distress.