Macroeconomic implications of consumer default policies, mortgage bailout guarantees & unemployment insurance

In this dissertation, I examine the effects of three broad government interventions in the economy: 1) bankruptcy and foreclosure laws; 2) bailout guarantees in the mortgage market; and 3) unemployment insurance. In the first chapter, I develop a general-equilibrium model of housing and default to jointly analyze the effects of bankruptcy and foreclosure policies. Heterogeneous households have access to mortgages and unsecured credit and can default separately on both types of debt. I show that the interaction between foreclosure and bankruptcy decisions is crucial for explaining the observed cross-state correlation between default policies and default rates. I use the model to argue that a major recent reform to bankruptcy has unintended consequences: it substantially increases bankruptcy rates, despite being intended to reduce them, and also increases foreclosure rates. Nevertheless, the reform yields large welfare gains. In the second chapter, I ask what are the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (e.g., Fannie Mae)? A model with heterogeneous, infinitely-lived households and competitive housing and mortgage markets is constructed to evaluate this question. Households can default on their mortgages via foreclosure. The bailout guarantee is a tax-financed mortgage interest rate subsidy. Eliminating this subsidy leads to a large decline in mortgage origination and increases aggregate welfare by 0.5\% in consumption equivalent variation, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: it hurts low-income and low-asset households. Finally, I evaluate the positive and normative implications of unemployment benefits. In the third chapter, we exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -the micro effect -we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively. The last three recessions in the United States were followed by jobless recoveries: while labor productivity recovered, unemployment remained high. In the fourth chapter, we argue that countercyclical unemployment This dissertation is available at ScholarlyCommons: http://repository.upenn. edu/edissertations/1373 benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefit expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits raises the outside option of unemployed workers in wage bargaining, thereby reducing firm profits from hiring and slowing down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consists with observed labor market dynamics, in particular the emergence of jobless recoveries after 1985. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries. In the fifth chapter, we use an equilibrium search model with risk-averse workers to characterize the optimal cyclical behavior of unemployment insurance. Contrary to the current US policy, we find that the path of optimal unemployment benefits is pro-cyclical positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains. Degree Type Dissertation Degree Name Doctor of Philosophy (PhD) Graduate Group Economics First Advisor Dirk Krueger