Working Papers

Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis, with Gyozo Gyongyosi
Revise and Resubmit, American Economic Review
Abstract: We examine the real economic consequences of a sudden increase in household debt burdens by exploiting spatial variation in the prevalence of household foreign currency debt during Hungary’s late-2008 currency crisis. The increase in debt burdens leads to higher default rates and a collapse in spending. These responses translate into a worse local recession and depressed house prices. A 10 point increase in debt-to-income raises the unemployment rate by 0.6 percentage points, driven by employment losses at non-exporting firms. Consistent with demand externalities of risky debt financing, regional foreign currency debt has negative spillover effects on nearby borrowers with only domestic currency debt.

Financial Crisis, Creditor-Debtor Conflict, and Political Extremism, with Gyozo Gyongyosi
Media: The Hill
Abstract: This paper studies the impact of debtor distress during a financial crisis on support for the populist far right. We use foreign currency borrowing of households in Hungary, combined with a large and unexpected exchange rate depreciation, as a natural experiment to generate a shock to household debt burdens. Exploiting zip code level variation in the prevalence of foreign currency household loans, we show that a 10 percentage point unexpected rise in debt-to-income increases the vote share of the far-right party Jobbik by 3 percentage points. Foreign currency debt exposure accounts for 20 percent of the overall rise in the far-right vote share, and the effect persists across multiple elections. This result is robust to a variety of alternative explanations for increased far-right support and is corroborated by survey data on debtors and far-right supporters. We present evidence that conflict between creditors and debtors over the resolution of the crisis is an important mechanism in the electoral success of the far right.

Salient Crises, Quiet Crises, with Matthew Baron and Wei Xiong
Revise and Resubmit, Quarterly Journal of Economics
Media: EconReporter
Abstract: By constructing a new historical dataset of bank equity returns for 46 countries over the period 1870-2016, we find that large bank equity declines predict persistent credit contractions and output gaps, after controlling for nonfinancial equities, even outside banking crises defined by narrative approaches. Bank equity returns allow us to measure the potential hindsight biases of narrative-based approaches and to expand the sample of crises beyond those identified by narrative accounts, which tend to focus on salient crisis symptoms, such as panics and government interventions. We find that quiet crises, defined by large bank equity declines without panics, are also associated with substantial credit contractions and output gaps. We use bank equity returns to refine existing narrative chronologies by uncovering a number of forgotten banking crises and removing spurious crises. Large bank equity declines tend to precede other crisis indicators, suggesting that substantial bank losses are already present at the early stages of crises.

Private Debt Booms and the Real Economy: Do the Benefits Outweigh the Costs?
Prepared for the INET Initiative on Private Debt
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.

The Consumption Response to Extended Unemployment Benefits in the Great Recession, with Graham McKee
Abstract: The Great Recession and the years that followed witnessed a dramatic expansion in the duration of unemployment insurance (UI) benefits available to unemployed workers in the United States. An important motivation for this policy was to stimulate demand by transferring funds to households that would be likely to spend them. This paper uses the variation across states in the UI expansion to estimate the consumption response to extended UI benefits. We estimate that an additional week of UI increased household consumption by a statistically significant 1.68 percent. Consistent with the hypothesis that unemployed households are likely to be particularly liquidity constrained, this point estimate translates into a marginal propensity to consume out of UI benefits in the range of 0.59-0.91, which is larger than existing estimates of the consumption response to income transfers for all households.


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, Forthcoming
Online Appendix
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.

Work in Progress

The Effects of a Large-Scale Debt Restructuring on Household Demand and Bank Credit Supply, with Gyozo Gyongyosi