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Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans
with Nuno Clara and Francisco Gomes.
October 2023.
Bank of Canada Staff Working Paper 2023-54.
[abstract]
In the United States, student debt currently represents the second largest component of consumer debt, just after mortgage loans. Repayment of those loans reduces disposable income early in the borrower’s lifecycle, when marginal utility is particularly high, and limits their ability to build a buffer stock of wealth to insure against background risks. In this paper, we study alternative student debt contracts that offer a 10-year deferral period. Borrowers defer either principal payments only (“Principal Payment Deferral”, PPD) or all payments (“Full Payment Deferral”, FPD) with the missed interest payments added to the value of the debt outstanding. We first calibrate an equilibrium with the current contracts, and then solve for counterfactual equilibria with the PPD or FPD contracts. We find that both alternatives generate economically large welfare gains, which are robust to different assumptions about the behavior of the lenders and borrower preferences. We decompose the gains into the percentages resulting from loan repricing and from the deferral of debt repayments. We compare these alternative contracts with the changes to Income Driven Repayment Plans being proposed by the current U.S. administration and show that they dominate such proposals. Crucially, the PPD and FPD contracts deliver similar welfare gains to the debt relief program considered by the administration, with no impact on the government budget constraint.
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The Macroeconomic Implications of Coholding
with Andrej Mijakovic.
June 2023.
[abstract]
This paper highlights the importance of the joint distribution of liquid assets and debt in understanding the consumption response of households to income changes. We show that grouping households across the distribution of liquid wealth, as is typically done, confounds two very different types of households. True hand-to-mouth households with low liquid wealth due to low liquid assets, and households with low liquid wealth due to high debt. The former type has a high marginal propensity to consume while the latter type has a high marginal propensity to repay debt. We add a cash-in-advance constraint to a standard consumption-savings model which generates the co-holding of liquid assets and debt observed in the data and matches the empirically observed marginal propensities to consume and repay debt. We apply our model to the study of stimulative fiscal policy and illustrate the role that the joint distribution of assets and debt plays in the aggregate marginal propensity to consume.
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Targeted vs. Timely Fiscal Stimulus Payments
March 2023.
[abstract]
This paper analyzes the tradeoff between targeted versus timely fiscal stimulus payments in a quantitative two-sector HANK model. In response to a negative sectoral shock, fiscal policy is specified as the total size of transfers, the degree of targeting towards households in the affected sector, and the length of periods until the policy can be implemented. The key trade-off in the model is that the degree of targeting is increasing in the delay until policy can be implemented. In the baseline calibration of symmetric equilibrium with one household wholly employed in each sector, the key result is that fully targeting the stimulus program to the household in the affected sector yields less total welfare than intermediate levels of targeting.
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Backfiring in Bad Times: When Rent Control Keeps Rent Too High
March 2023.
[abstract]
Rent control, intended to benefit renters by capping rent increases, may disincentivize landlords from lowering rents during temporary negative demand shocks because they are unable to quickly increase rent afterward. To test this prediction, I use a unique combination of exogenous variation in rent control policy in Toronto and a negative demand shock induced by the COVID-19 pandemic. In line with theory, rent per square foot decreased by 3.6% for rent controlled units and 6.5% for exempt units. Using a model of differentiated demand, I construct a counterfactual exercise and estimate that in the absence of rent control, rent would have decreased by 9.1% for rent-controlled units and 9.9% for exempt units.
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Evaluating the Impact of Economic Impact Payments
December 2020.
[abstract]
As part of the CARES Act, the IRS distributed $300 billion in Economic Impact Payments (EIPs) directly to US households. In the Census Bureau’s Household Pulse Survey (HPS), almost 75% of households receiving an EIP reported mostly spending it. Conditioning on labor status, 63% of employed households reported mostly spending their EIPs, compared to 84% of unemployed households. Both types of households reported spending largely on consumption goods, but unemployed households tended to pay regular bills while employed households paid down debt or increased savings. The evidence suggests that in designing an untargeted stimulus program and trading off potential efficacy for timeliness, Economic Impact Payments were overall very effective in supporting consumer spending.