Liquidity

Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market

This paper investigates the macroeconomic effects of search risk in the housing
market. To do so, I introduce a tractable directed search model of housing with mul-
tidimensional buyer and seller heterogeneity. I incorporate this framework in an in-
complete markets macroeconomic model with long-term mortgages and equilibrium
default. I show that search risk spills over into higher foreclosure risk by creating a
debt overhang problem. Heavily indebted sellers post high selling prices, take a long

Monetary Mechanisms

We provide a series of results for a standard model where exchange is facilitated by liquid assets. Compared to past work, minimal structure is imposed on the mechanism determining the terms of trade. Four simple axioms lead to a class of mechanisms encompassing common bargaining theories, competitive price taking and other solution concepts. Using only the axioms, we establish existence and (perhaps more surprisingly) uniqueness of stationary monetary equilibrium. We also show how to support desirable outcomes using creatively designed mechanisms.

Failure to Launch: Housing, Debt Overhang, and the Inflation Option During the Great Recession

Can inflating away nominal mortgage liabilities cure debt overhang and combat a severe housing bust? With a focus on the Great Recession, I address this question using a structural macroeconomic model of illiquid housing, endogenous credit supply, and equilibrium default. First, I show that the model successfully replicates and provides insight into the dynamics of the U.S. economy since 2006. Second, I show that temporarily raising the inflation target would have cut foreclosures by over 60% and led to a more robust recovery in real economic variables.

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