UCLA

These essays contribute to the study of quantitative-theoretic equilibrium models in which agents can choose to optimally default on their debt obligations. Chapters 1 and 2, which are both joint work with Seth Neumuller, consider models with heterogeneous households. In Chapter 1, we introduce statistical learning and aggregate uncertainty into a heterogeneous households model with unsecured debt. We demonstrate that a model with learning produces credit booms during prolonged economic expansions and an endogenous severe and protracted credit crunch in response to a sequence of shocks similar to the recent financial crisis. This chapter illustrates that learning by households and creditors is an important driver of aggregate debt dynamics since the start of the Great Moderation. Chapter 2 considers an equilibrium model of mortgage and unsecured credit markets that features both long-term collateralized mortgage contracts and short-term unsecured debt. We use this framework to evaluate whether the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) contributed to the severity of the housing crisis by inducing homeowners to default on their mortgage that would have declared bankruptcy and remained in their home in the absence of the reform. We conclude that although the BAPCPA significantly increased mortgage default rates on impact in 2005, this reform had minimal impact on the severity of the subsequent housing crash. This finding is the result of an optimal tightening of mortgage lending standards in response to heightened household default incentives. Therefore, considering the equilibrium response of mortgage prices to evolving household incentives is crucial to our findings. Finally, Chapter 3 focuses on the ability of countries to default on their debt obligations. In this chapter, I evaluate the impact of the presence of bailouts by international institutions, such as the IMF, on sovereign business cycles, default frequency, and social welfare. This analysis suggests that allowing for the presence of third-party bailouts can help explain the unique characteristics of business cycles and the historical frequency of default events in emerging economies. Moreover, this chapter concludes that bailouts tend to reduce social welfare.