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Working Paper
Currency speculation and the optimum control of bank lending in Singapore dollar: a case of partial liberalization
The Monetary Authority of Singapore (MAS) has a long-standing policy of controlling bank lending in Singapore dollars to nonresidents and to residents who use the funds outside Singapore. While the control may prevent the internationalization of the Singapore dollar and contain exchange rate volatility, it can hinder the deepening and widening of the financial markets in Singapore. ; This paper suggests three policy options that would allow traders and investors to borrow Singapore dollars without any restrictions, while making it costly for speculators since their activities can cause ...
Working Paper
A leverage-based model of speculative bubbles
This paper develops an equilibrium model of speculative bubbles that can be used to explore the role of various policies in either giving rise to or eliminating the possibility of asset bubbles, e.g. restricting the use of certain types of loan contracts, imposing down- payment restrictions, and changing inter-bank rates. As in previous work by Allen and Gorton (1993) and Allen and Gale (2000), a bubble arises in the model because traders are assumed to purchase assets with borrowed funds. My model adds to this literature by allowing creditors and traders to enter into a more general class of ...
Journal Article
Bubble, toil, and trouble
When people call the dot-com boom a bubble, they imply that investors based their decisions on something other than a good estimate of the future value of the assets theywere buying. But some economists say that is not likely because episodes like the dot-com bust show future value is not always easy to predict, especially when the asset is a new technology. This Commentary shows how both explanations can describe a famous historical bubble that occurred after the introduction of a technology that was new at the beginning of the eighteenth century?a novel macroeconomic theory.
Working Paper
Speculative runs on interest rate pegs the frictionless case
In this paper we show that interest rate rules lead to multiple equilibria when the central bank faces a limit to its ability to print money, or when private agents are limited in the amount of bonds that can be pledged to the central bank in exchange for money. Some of the equilibria are familiar and common to the environments where limits to money growth are not considered. However, new equilibria emerge, where money growth and inflation are higher. These equilibria involve a run on the central bank's interest target: households borrow as much as possible from the central bank, and the ...
Working Paper
HOUSING SPECULATION, GSES, AND CREDIT MARKET SPILLOVERS
In 2021, the U.S. Treasury reduced the exposure of government-sponsored enterprises (GSEs) to speculative mortgages. As a result, GSE purchases of these loans fell by about 20 percentage points. The consequent decline in credit to speculators, however, was mitigated both by entry of corporate investors and because banks began holding more of these loans. By increasing bank exposure to local risk, this move reduced banks’ willingness to supply both jumbo mortgages and small business loans. Our empirical design fully accounts for risks at the balance sheet level. Banks thus manage credit not ...
Newsletter
Interest-only mortgages and speculation in hot housing markets
Even as housing markets have temporarily shut down across the U.S. during the Covid-19 pandemic, housing remains a key sector that contributes disproportionately to fluctuations in overall economic activity and that will likely play an important role as the economy reopens. Interest in this market among research economists and policymakers intensified after the exceptional boom and bust in housing between 2003 and 2008. In this Chicago Fed Letter, we describe research in Barlevy and Fisher (2020)1 that examined patterns in the kinds of mortgages homebuyers took out in different cities during ...
Report
Are market makers uninformed and passive? Signing trades in the absence of quotes
We develop a new likelihood-based approach to signing trades in the absence of quotes. This approach is equally efficient as the existing Markov-chain Monte Carlo methods, but more than ten times faster. It can address the occurrence of multiple trades at the same time and allows for analysis of settings in which trade times are observed with noise. We apply this method to a high-frequency data set of thirty-year U.S. Treasury futures to investigate the role of the market maker. Most theory characterizes the market maker as an uninformed, passive supplier of liquidity. Our findings suggest, ...
Working Paper
Second Home Buyers and the Housing Boom and Bust
Record-high second home buying (homeowners acquiring nonprimary residences) was a central feature of the 2000s boom, but the macroeconomic effects remain an open question partly because reliable geographic data is currently unavailable. This paper constructs local data on second home buying by merging credit bureau data with mortgage servicing records. The identification strategy exploits the fact that the vacation share of housing from the 2000 Census is predictive of second home origination shares during the boom years, while also uncorrelated with other boom-bust drivers including proxies ...