Slide 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 evidenceCaution: not clear in the empirical literature that the ZLB is necessaryPossible tension with theory. Would be nice to explore other possible frictionsOther work

Thank you to the venue for having me when is the book availableThis book is the culmination of research we conducted over the past 8 years our studies are really telling one story

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Can monetary policy solve this problem?Not really

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 externalityd vs. DGet inefficient outcome even with complete marketsFarhi and Werning, Korinek and SimsekCredit cycles and inequalityThe discussion has to involve income and wealth inequality as wellLenders and borrowers differ systematicallyThe paper is agnostic about the timing of credit cyclesBut evidence suggests that the credit cycle is related to rising inequalityCould credit cycle be a GE response to disequilibriating forces?

graph with world war, soviet, great depression, EU recession, Japan, US on one graph - ask can u tell massive bombing destruction - separate it from "regular recession"- highlight the loss in terms gdp per capita today vs. trend- twin peak graph - why is debt so mysteriously destructive? On a scale of world wars and empires disintegrating.

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- it is not a coincidence, we explain why.

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Relevant forces outside of modelNon-standard preferences What if a quarter to one-third of the population was myopic?Fire sale externalityEqually importantEmployment feedbackMandating change?Mandating / subsidizing state-contingent financial contracts that automatically redistribute towards the more constrained agents ex-postGetting rid of the bias induced by capital regulationGetting rid of the bias induced by tax policyOur financial regulation and tax policy makes no sense from a macro stability perspective.This paper crystallizes some of the core issues in this debate.Buying a $200K Home15House Prices Drop 40%

-- In this example, the debtor loses $80K. But what would happen if the value of the home dropped more than 50%? Can the debtor just walk away with out any consequences?

-- No. Her credit score is going to be severely affected, and in some instances the creditor can go after her personal resources.

-- This of course brings up the question how harsh are the penalties we can impose on borrowers? In a corporate setting, corporations have limited liability. But what does limited liability mean when we are talking about an individual who has defaulted on a mortgage or credit card loan?16Debt concentrates risk on the debtor the lender largely escapes unscathed

Who are lenders? Debt and inequality naturally connectedConcentration of Losses

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The Rich Lend to the Poor18

The Distribution of Losses Matters!Bill Gates19

The aggregate demand feedback20The employment feedback

- Perhaps we have been making the wrong divisive arguments. Focus on the collective gain, question of policy, market design, and regulation are precisely relevant when we can make our collective better. To put it differently, lets not leave money on the table. Should graph of GDP and deviation from trend, and what that means for bad choices.- Give the foreclosure example: the decision of a lender versus the common good.- One can take a political view, ideological view, equity view, moral view . - And while there is an important political and distributional side to this debate, there is an equally strong economic argument.- people borrow too much to consume, and then they have to cut back, so what's the mystery? WRONG!!- the Indiana example,- go through producing apples and oranges.

21The fire-sale feedback