Contact Information: andres.sarto@chicagobooth.edu. 

Abstract: An unprecedented credit boom that began in the early 2000s was a central cause behind the global financial crisis. Both a housing boom and a relaxation of lending constraints that unlocked an aggressive channeling of funds to the mortgage market (the financial intermediary channel) were key determinants of the credit boom. However, little is known about the relative roles played by each factor. This paper provides a new empirical strategy to shed light on this issue. The strategy exploits the fact that both channels operate on different networks, with the housing channel being highly segmented compared to the financial intermediary channel. I show that both channels played a significant role in amplifying the rise in credit. In the preferred specification, the housing channel accounts for 51% of the observed amplification. Both the amount of amplification and the proportion explained by the housing channel are larger (66%) in areas with more inelastic land supply. Regions with very elastic land supply still display significant regional credit multipliers thanks to the financial intermediary channel, which accounts for 71% of the effects. The large role played by the financial intermediary channel implies that current macroprudential policies aimed at curbing future credit booms are insufficient.

Presentations (incl scheduled): PUC-Chile, AFA 2025, Macro Identification with Micro Data, IMF Macrofinancial seminar, UMBC. 

Abstract: Over the past two decades, shadow banks have significantly expanded their share of residential mortgage lending, even surpassing pre-financial crisis levels. This surge is often attributed to post-crisis regulatory changes and improvements in shadow banks’ technology. In this paper, we document a new driving force: the persistent decline in interest rates. When interest rates are high, cheap deposit funding provides banks with a significant competitive advantage against shadow banks relying on wholesale funding. As interest rates plummet, banks lose this advantage, experience a squeeze in their net interest margin, leading to diminished profitability, weaker growth, and cost-cutting measures such as branch closures. By contrast, shadow banks are able to gain market share. We test this mechanism using a shift-share empirical design based on differences in historical bank balance sheet composition. We find that banks more vulnerable to falling interest rates contracted lending as a response to lower profitability while also scaling back non-interest expenses on their branches. This created a fertile environment for non-banks to expand in areas with banks exposed to declining interest rates.

Presentations (incl scheduled and co-authors): 16th annual conference of the LSE Paul Woolley Centre, SED (Barcelona), FIRS (Berlin), 1st UIC Finance Conference, Miami Herbert Business School, 15th Florida State University Truist Beach Conference, AFA 2024, SAET Conference, the NBER Summer Institute (Corporate Finance and Risks of Financial Institutions), the Rome Junior Finance Conference, the BSE Summer Forum, the 21st Macro Finance Society Workshop, the OFR Rising Scholars Conference on the Future of Financial Stability, the Swiss Winter Conference on Financial Intermediation, the UCLA-David Backus Memorial Conference, CUNY, NYU Stern, LSE.

Abstract: This paper introduces a new approach for estimating credit multipliers, i.e. the amplification of credit supply shocks due to general equilibrium feedback effects such as the rise in collateral value. The approach is based on comparing the within-region estimate, that captures the partial equilibrium effects, with the across-region estimate, that captures the regional general equilibrium effects fenced-in by trade or transport costs. Applying our methodology to the 2000’s housing cycle, we find a large credit multiplier that more than quadruples the partial equilibrium effect. Regional credit multipliers are stronger in areas that are less open to trade, or have more inelastic land supply.

Presentations (incl by co-authors): European Finance Association 48th Annual Meeting, Society for Economy Dynamics 2022 Annual Meeting, NYU Stern, Princeton Macro Faculty Lunch, Central Bank of Chile, and Universidad Adolfo Ibáñez.

Abstract: Do local labor markets adjust to economic shocks through migration? In this paper, we study this question by focusing on two of the most important shocks that hit US manufacturing since the 1990s: Chinese import competition and the introduction of industrial robots. Even though both shocks drastically reduced manufacturing employment, we find that only robots led to a sizable decline in population. We provide evidence that negative employment spillovers outside manufacturing, caused by robots but not by Chinese imports, can explain the different migration responses.

Presentations (incl by co-authors): European Research Workshop in International Trade (ERWIT) 2021, CEPR Annual Symposium in Labour Economics 2021, EEA Virtual Congress 2020, UEA Summer School 2019, UEA Virtual 2020, NYU Stern, WWZ Basel Economics Lunch.

Abstract: I propose a new approach for estimating the aggregate effects of government policies directly from regional time series variation. The method relies on regions displaying enough heterogeneity in their response to aggregate macro shocks. With only mild restrictions on regional parameters, it combines SVAR methods with factor analysis to estimate the underlying structural shocks. In particular, it shows it is possible to identify the aggregate SVARs implied by the regional time series without any restrictions on the contemporaneous effects. Hence, the approach substantially weakens the identification assumptions imposed in typical SVARs. An application that estimates the aggregate fiscal multiplier in the U.S. flips the estimate of the contemporaneous effect from negative (under OLS) to positive, and renders a multiplier of approximately 0.82.

Presentations: NBER Summer Institute (Micro Data and Macro Models), NYU Stern, Boston College, Georgetown, Fed Board, San Francisco Fed, Rochester, Boston Fed, Richmond Fed.