We analyze misallocation of capital in a model where firms face different types financial constraints. Private borrow subject to collateral constraint while public issue long-term bonds default risk. estimate our using employment and statistics reflecting the overall distribution conjunction with firm-level data on credit spreads that we target for set firms. In model, productive private firm i...

I develop a highly tractable, heterogeneous agent, incomplete markets dynamic stochastic general equilibrium model with collateralized lending and asset-backed securities. Agents who face aggregate and idiosyncratic investment risk can borrow by putting up their investments as collateral. Borrowers can default at any time, with the only penalty being the confiscation of collateral. The debt con...

This paper develops a quantitative general equilibrium model of sovereign default with heterogenous agents to account for spillover of default risk across countries. Borrowers (sovereign governments) and foreign lenders (investors) in the model face financial frictions, which endogenously determine each agent’s credit condition. Due to lack of enforcement in sovereign debt, borrowing constraint...

This paper shows that the quantitative predictions of an equilibrium asset-pricing model with financial frictions are consistent with key features of the Sudden Stop phenomenon. Foreign traders incur costs in trading assets with domestic agents, and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings. When this constraint does not bind, sta...

The financial architecture prior to the recent crisis was a system of mobile collateral. Safe debt, whether government bonds or privately produced bonds, that is, asset-backed securities, could be traded, posted as collateral, and rehypothecated, moving their highest value use. Since crisis, regulatory changes have aimed make collateral immobile, most notably with BIS liquidity coverage ratio (...

By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a li...

This paper examines why credit constraints for domestic and exporting firms arise in a setting where banks do not observe firms’ productivities. To maintain incentive-compatibility, banks lend below the amount needed for first-best production. The longer time needed for export shipments induces a tighter credit constraint on exporters than on purely domestic firms, even in the exporters’ home m...

This paper considers tax policies to deal with Sudden Stops – declines in aggregate activity that are magnified by a binding collateral constraint – that occasionally occur in emerging market economies. Households and/or the government are assumed to face model uncertainty and desire robustness against alternative models. Welfare gains from optimal taxation are small if the government trusts it...