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We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be…
In normal times, it is assumed that financial institutions operating in non-overlapping sectors have complementary and distinct outcomes, typically reflected in mostly uncorrelated outcomes and asset returns. Such is the reasoning behind…
We study how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long slumps. We propose a theory in which the positive interaction between firm entry, competition and factor supply can give…
We show that, in a market economy, the aggregate production level depends not only on the aggregate variables but also on the distribution of individual characteristics (e.g., productivity, credit limit, ...). We prove that, due to…
We use a controlled laboratory experiment to study the causal impact of income decreases within a time period on redistribution decisions at the end of that period, in an environment where we keep fixed the sum of incomes over the period.…
It is known that recursive training from generative models can lead to the so called `collapse' of the simulated probability distribution. This note shows that one in fact gets two different asymptotic behaviours depending on whether an…
What causes house prices to rise and fall? Economists identify household access to credit as a crucial factor. "Loan-to-Value" and "Debt-to-GDP" ratios are the standard measures for credit access. However, these measures fail to explain the…
We introduce a dynamic and stochastic interbank model with an endogenous notion of distress contagion, arising from rational worries about future defaults and ensuing losses. This entails a mark-to-market valuation adjustment for interbank…
Much of the analysis of economic growth has focused on the study of aggregate output. Here, we deviate from this tradition and look instead at the structure of output embodied in the network connecting countries to the products that they…
The widespread use of generative models has created a feedback loop, in which each generation of models is trained on data partially produced by its predecessors. This process has raised concerns about model collapse: A critical degradation…
By generalizing the measurements on the game experiments of mixed strategy Nash equilibrium, we study the dynamical pattern in a representative dynamic stochastic general equilibrium (DSGE). The DSGE model describes the entanglements of the…
High-quality data is essential for training large generative models, yet the vast reservoir of real data available online has become nearly depleted. Consequently, models increasingly generate their own data for further training, forming…
We introduce a novel framework for individual-level welfare analysis. It builds on a parametric model for continuous demand with a quasilinear utility function, allowing for heterogeneous coefficients and unobserved individual-good-level…
We propose a semi-structural DSGE model for the Israeli economy, as a small open economy, which contains a financial friction in the household sector credit market. Such a friction is reflected in a positive relationship between households'…
Banking system crises are complex events that in a short span of time can inflict extensive damage to banks themselves and to the external economy. The crisis literature has so far identified a number of distinct effects or channels that…
This paper demonstrates how reinforcement learning can explain two puzzling empirical patterns in household consumption behavior during economic downturns. I develop a model where agents use Q-learning with neural network approximation to…
In this paper, simple mathematical models from Control Theory are applied to three very important economic paradigms, namely (a) minimum wages in self-regulating markets, (b) market-versus-true values and currency rates, and (c) government…
'Animal spirits' or confidence levels are heavily dependent on how current conditions compare to adaptation levels. In the US, with its highly flexible labor markets and weak safety nets, the unemployment rate seems to serve as a…
While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to…
How do macro-financial shocks affect investor behavior and market dynamics? Recent evidence on experience effects suggests a long-lasting influence of personally experienced outcomes on investor beliefs and investment, but also significant…