Financial institutions

The post-pandemic inflation surge is often attributed to pent-up demand andopportunistic price hikes. In fact, it is better explained by the effects of theeconomy’s production network and “state-dependent” pricing, where firmschange prices optimally when the reward justifies the effort. Firms are tightlylinked through supply chains so a surge in prices upstream can triggersimultaneous repricing by many layers of firms downstream, fuelling broad-based inflation.

We use a novel data set containing all corporate loans throughout the Eurozone to document a series of novel stylized facts on the relationship between collateral and the probability of default. First, we show that the pervasive empirical finding that riskier borrowers pledge collateral is driven by economists’ informational disadvantage relative to banks. Accounting for time-varying bank- and firm-specific risk factors produces negative correlations consistent with theory. Second, the relationship between pledging collateral and the probability of default is non-linear.

We propose a robust semi-parametric framework for persistent time-varying extreme tail behavior, including extreme Value-at-Risk (VaR) and Expected Shortfall (ES). The framework builds on Extreme Value Theory and uses a conditional version of the Generalized Pareto Distribution (GPD) for peaks-over-threshold (POT) dynamics.

Kabir Dasgupta, Brenden J. MasonWe exploit the spatiotemporal variation in US states’ interest rate ceilings on small-dollar loans to identify the effect of liquidity constraints on labor supply. Exogenously-capped interest rates lead to consumers being shut out of the market for cash loans. In response, labor supply increases by approximately 0.4 hours per week. We also find that the propensity to take personal leaves decreases.