Essays in Finance and Macroeconomics

Abstract

This dissertation presents three chapters that examine subjects at the intersection of finance and macroeconomics. The first chapter examines households’ credit card borrowing behavior and develops a heterogeneous-agent model that predicts macro-financial dynamics in the US credit card market. The model incorporates presented-biased time preferences, which lead households to persistently revolve high-interest credit card debt. Despite not being credit-constrained, these households exhibit elevated consumption responses to liquidity shocks due to indebted saving behavior. Thus, the model aligns well with empirical evidence on both unsecured borrowing patterns and consumption responses to liquidity shocks. Furthermore, policy analyses using this enhanced model illustrate that prevalent and persistent credit card borrowing reshapes households’ responses to fiscal and monetary policy. The second chapter analyzes the debt forbearance policy in the US mortgage market and examines its impact on household liquidity and labor market stability during economic downturns. By leveraging intermediation frictions in forbearance induced by mortgage servicers, empirical analyses show that mortgage debt forbearance played a significant role in boosting local demand and led to a faster recovery of employment in the local labor market. In a model incorporating geographical heterogeneity in intermediation frictions, the labor market estimates imply household-level spending responses to increased liquidity that align well with existing estimates for direct fiscal transfers. The implied debt-financed fiscal multiplier effects are sizable but depend on the repayment terms of deferred payments and the monetary policy stance. The third chapter studies the impact of financial windfalls on household portfolio choices and risk exposure. By leveraging the randomized assignment of lottery prizes in three Swedish lotteries, empirical analyses show that a windfall gain leads to a decline in the risky share of household portfolios. Theoretical analyses explore how the financial wealth elasticity of the risky share helps distinguish between competing models of risk preferences. Furthermore, a calibrated dynamic portfolio choice model incorporating nontradable human capital and consumption habits predicts responses that are both qualitatively and quantitatively consistent with the empirical estimates.