Macroeconomics

For general choice spaces, standard dynamic preference models cannot simultaneously satisfy the properties of time consistency, the separation of time and risk preferences, and the ability to accommodate an indifference to the timing of when risk is resolved. In the context of a consumption-portfolio choice problem often underlying asset pricing and macro models, we derive necessary and sufficient conditions such that all three properties are satisfied.

We introduce a new indicator of fiscal capacity—the "austerity threshold": the debt-to-GDP level above which the government must raise fiscal surpluses to ensure debt safety. In a model with realistic risk premia, nominal rigidities, and an intermediary sector, calibrated to the U.S., we estimate this threshold at 189%. We highlight the roles of safety premia and intermediation-driven convenience yields. The threshold varies with the source of surpluses: spending cuts reduce inflation and allow low interest rates, while tax increases distort labor supply and raise inflation.

Real rates declined by more than 4% points between 1980 and 2023 driving large capital gains on long-lived assets. Households that rely on their financial wealth to finance future consumption need more wealth to fund the same consumption plan after rates have declined. To be hedged against interest rate risk, households need to match the duration of their portfolio to the duration of a claim on their future consumption in excess of labor income. We find that young and poor US households were worse off when rates declined, because they had too little duration in their portfolios.

This chapter summarizes the tectonic shifts that took place in the U.S. housing market between 2019 and 2025. I explore the roles of remote work and lower interest rates in the dramatic rise of aggregate house prices, the"flattening" of the urban bidrent curve in the cross-section of locations, and the fiscal implications of the "Urban Doom Loop." I discuss how mortgage lock-in effects may have stabilized house prices in the wake of more recent increases in interest rates, at the expense of residential mobility.

We analyze real returns on U.S. and U.K. government debt during major wars and the COVID-19 pandemic over the past three centuries. Wars are associated with sharply negative real returns on outstanding government debt, with returns falling far below economic growth, in contrast to peacetime periods when returns exceed growth. Elevated surprise inflation and financial repression account for a cumulative 31% wedge between returns and growth over four years of war, implying that bondholders bear a substantial share of wartime fiscal costs.

We develop a dynamic urban model that incorporates key elements of macro-housing models into an internal city structure with commuting. The model includes many locations, costly migration, forward-looking households, life cycle dynamics, income risk, homeownership choice, and housing frictions. Our solution method avoids the curse of dimensionality from commuting, efficiently computing steady states and transition dynamics.

We examine whether the adoption of the Current Expected Credit Losses (CECL) model, which incorporates forward-looking information in loan loss provisions (LLPs), enhances banks’ information production. Consistent with better information production, we document significant changes in both financial reporting and operational outcomes following CECL adoption. First, CECL banks’ LLPs become timelier and better reflect future local economic conditions. Second, CECL banks experience lower rates of loan defaults.

Accounting Standards Update (ASU) 2016-01 requires that unrealized gains and losses on equity investments (equity-URGL) previously recognized in other comprehensive income now be included in net income. Using a sample of public insurers, we examine how this accounting standard change influences managerial investment decisions, with a particular focus on the moderating effects of compensation contracting and financial reporting practices.