Assistant Professor, Columbia University (on leave at UCLA Anderson)
A Q-Theory of Inequality (2020) with E. Gouin-Bonenfant
We study the effect of interest rates on wealth inequality. While low rates decrease the average growth rate of existing fortunes, they increase the growth rate of new fortunes by making it cheaper to raise capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the average equity issuance rate and leverage of individuals reaching the right tail of the distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. We conclude that the secular decline in discount rates has played a key role in the recent increase of top wealth inequality.
Decomposing the Growth of Top Wealth Shares (Revised February 2021)
R&R, Econometrica (2nd round)
Top percentiles do not include the same individuals over time. As a result, the growth of a top wealth share is not simply equal to the average wealth growth of individuals in the top percentile: it also depends on a displacement term, which accounts for the flow of individuals in and out of the top percentile, and a demography term, which accounts for death and population growth. I propose an accounting framework to measure each term using panel data. I also provide an analytical framework to relate the displacement and demography terms to the statistical properties of wealth growth. Empirically, I find that the displacement term accounts for more than half the rise in top wealth inequality in the U.S.
Sorting Out the Real Effects of Credit Supply (2020) with B. Chang and H. Hong
We document that banks which cut lending more during the Great Recession lent to riskier firms. To reconcile this evidence, we build a competitive matching model of bank-firm relationships. Riskier firms borrow from banks with lower holding costs or higher abilities to securitize. We use our sorting model to recover bank holding costs based on default probabilities and equilibrium loan rates. Our model attributes 60% of the Great Recession decline in corporate loans to higher bank holding costs or credit supply and 40% to elevated firm risks or credit demand. We interpret reduced-form panel regression estimates of the bank lending channel using our framework.
Wealth Inequality and Aggregate Risk (2017)
I document a strong interplay between asset prices and wealth inequality (i) when stock returns are high, inequality increases (ii) higher inequality predicts lower stock returns. This corresponds to the basic prediction of a model where agents have heterogeneous preferences. Quantitatively, however, the model cannot match the excess volatility of asset prices without implying a wealth distribution with a tail thicker than the data. I suggest two parsimonious deviations to resolve this tension: (i) "live-fast-die-young dynamics", in which risk-tolerant investors remain levered only for a short period of time, (ii) time-varying investment opportunities for the rich relative to the rest.
Video of the Wealth Density with Regime Switches
Bank Exposure to Interest-Rate Risk and the Transmission of Monetary Policy with A. Landier, D. Sraer, and D. Thesmar
Journal of Monetary Economics (2020)
The cash-flow exposure of banks to interest rate risk, or income gap, is a significant determinant of the transmission of monetary policy to bank lending and real activity. When the Fed Funds rate rises, banks with a larger income gap generate stronger earnings and contract their lending by less than other banks. This finding is robust to controlling for factors known to affect the transmission of monetary policy to bank lending. It also holds on loan-level data, even when we control for firm-specific credit demand. When monetary policy tightens, firms borrowing from banks with a larger income gap reduce their investment by less than other firms.