Working Papers

Failing Banks, with Sergio Correia and Stephan Luck
Media: Finance & History podcast
Abstract: Why do banks fail? We create a panel covering most commercial banks from 1863 through 2023 and study the history of failing banks in the United States. Failing banks are characterized by rising asset losses. Losses are typically preceded by rapid lending growth, financed by non-core funding. Bank failures, including those that involve depositor runs, are highly predictable based on bank fundamentals, even in the absence of deposit insurance and a central bank. We construct a new measure of systemic risk using bank-level fundamentals and show that it forecasts the major waves of banking failures in U.S. history. Altogether, our evidence suggests that failures caused by runs on healthy banks are uncommon. Rather, the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.

The Debt-Inflation Channel of the German Hyperinflation, with Markus Brunnermeier, Sergio Correia, Stephan Luck, and Tom Zimmermann
Revise and Resubmit, American Economic Review
Media: VoxEU, Liberty Street Economics, Virtual presentation (Markus’ Academy)
Abstract: This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.

The Foreign Currency Fisher Channel: Evidence from Households, with Gyozo Gyongyosi and Judit Rariga
Media: SUERF Policy Brief
Abstract: This paper studies how households adjust consumption and labor supply to a large revaluation of foreign currency-denominated household debt. Our analysis uses detailed household-level data during Hungary’s large depreciation in 2008. Relative to similar local currency debtors, foreign currency debtors reduce consumption expenditures one-for-one with increased debt service, consistent with a foreign currency Fisher channel of the depreciation. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with a “flight from quality.” Debt revaluation does not affect overall labor supply, but there is a small adjustment toward foreign income streams and a substantial increase in home production.

Business as Usual: Bank Net Zero Commitments, Lending, and Engagement, with Pari Sastry and David Marques-Ibanez
Media: New York Times, CNN Business
Abstract: We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization.

Publications

Credit Allocation and Macroeconomic Fluctuations, with Karsten Müller
Review of Economic Studies, 2023
ReStud Version, Replication Kit, Website with sectoral credit database: The Global Credit Project
Media: World Bank All About Finance Blog, Marginal Revolution, Yahoo Finance, Noahpinion
Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu, with Sergio Correia and Stephan Luck
Journal of Economic History, December 2022 (Lead Article)
JEH Version, Replication Kit, Response to Lilley et al
Selected Media: Video of presentation from IMSI Conference (Session IV), The Economist, Vox, The Atlantic, NY Times, NY Times (Upshot), NY Times (John Barry)
Abstract: We study the impact of non-pharmaceutical interventions (NPIs) on mortality and economic activity across U.S. cities during the 1918 Flu Pandemic. The combination of fast and stringent NPIs reduced peak mortality by 50% and cumulative excess mortality by 24% to 34%. However, while the pandemic itself was associated with short-run economic disruptions, we find that these disruptions were similar across cities with strict and lenient NPIs. NPIs also did not worsen medium-run economic outcomes. Our findings indicate that NPIs can reduce disease transmission without further depressing economic activity, a finding also reflected in discussions in contemporary newspapers.

Financial Crisis, Creditor-Debtor Conflict, and Populism, with Gyozo Gyongyosi
Journal of Finance, August 2022
JF Version
Media: The Hill, LSE, MIT News
Abstract: We study the impact of debtor distress during a financial crisis on support for a populist far-right political party. Our empirical approach exploits variation in exposure to foreign currency household loans during a currency crisis in Hungary. Foreign currency debt exposure leads to a large and persistent increase in support for the far-right populist party. We present evidence that the far right advocated for foreign currency debtors’ interests by proposing aggressive debt relief and was rewarded with support from these voters. Our findings are consistent with theories emphasizing that conflict between creditors and debtors can shape political outcomes after financial crises.

Banking Crises Without Panics, with Matthew Baron and Wei Xiong
Quarterly Journal of Economics, February 2021
QJE Version, Replication Kit, BVX banking crisis chronology
Media: EconReporter, MIT News
Abstract: We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics are an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics.

Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis, with Gyozo Gyongyosi
American Economic Review, September 2020 (Lead Article)
AER Version
Media: AEA Chart of the Week, Telex.hu
Abstract: We examine the consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary’s late-2008 currency crisis. The revaluation of debt burdens causes higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by a decline in local demand, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into an output multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets.

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels, with Atif Mian and Amir Sufi
Journal of Finance, April 2020
JF Version, Online Appendix, Replication Kit
Media: FT Alphaville, Equitable Growth, Barron’s, Chicago Booth Review, Woodrow Wilson School
Abstract: Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. This study develops an empirical test to determine whether the household demand channel of credit supply expansion is present, and it implements the test using both a natural experiment in the United States in the 1980s based on banking deregulation and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, credit supply expansion boosts non-tradable sector employment and the price of non-tradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle, leading to more severe recessions.

Household Debt and Business Cycles Worldwide, with Atif Mian and Amir Sufi
Quarterly Journal of Economics, November 2017
QJE Version, Online Appendix, Replication Kit
Out-of-sample replication on the IMF's Global Debt Database, Replication kit for out-of-sample test
Media: NBER Digest, Equitable Growth, The Economist, Chicago Booth Review
Abstract: 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.

Book Chapters

Private Debt Booms and the Real Economy: Do the Benefits Outweigh the Costs?
in Leveraged: The New Economics of Debt and Financial Fragility, (Edited by Moritz Schularick), The University of Chicago Press, 2022
Replication Kit
Media: Video of presentation. Link to all conference presentations.
Abstract: Probably not. Economic development coincides with rising private debt-to-GDP. This partly reflects the economic benefits of credit deepening, which facilitates a better allocation of savings towards productive investment. However, private debt booms, episodes of rapid expansion in private debt-to-GDP, systemically predict growth slowdowns that result in lower real GDP. Debt booms distort the economy by boosting demand instead of productive capacity and by fueling asset price booms. These booms leave in their wake private debt overhang, banking sector distress, and an overvalued real exchange rate. Private debt booms are thus distinct from credit deepening episodes, and the costs of these booms likely outweigh the benefits.