Research

Mortgage Forbearance and Financial Distress in the Long Run

Latest Version: November 05, 2024

Mortgage relief programs are crucial for distressed households during economic downturns, but their long-term effects remain underexplored. This paper offers new micro-level evidence on the long-term efficacy of mortgage payment pauses, or forbearance, in mitigating financial distress during and after the COVID-19 pandemic. Using data from 500,000 consumer credit reports, I study the causal effects of mortgage forbearance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act on household financial stability. Leveraging quasi-random variation in mortgage servicers’ forbearance provision, I identify significant reductions in mortgage delinquency rates—up to 5 percentage points—and foreclosure rates by 1 percentage point, persisting three years post-forbearance. Additionally, the program had beneficial spillover effects on revolving credit stability, reducing credit card delinquencies by 2 percentage points and utilization rates by roughly 15 percentage points relative to the pre-pandemic period. Upon exiting forbearance, borrowers not only avoided financial ‘rebound effects,’ but also sustained improved financial stability for more than two years following the policy’s implementation.

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On Eliciting Subjective Probability Distributions of Expectations

Latest Version: May 16, 2024

Using data from a large survey of American households, we compare density forecasts elicited with bins- and scenarios-based questions. We show that inflation density forecasts are sensitive to the survey question designs used to elicit them. The within-person discrepancy is smaller, but still discernible, for unemployment expectations. The discrepancy in responses is systematically related to sociodemographic characteristics of respondents. The differences shed light on the significance of priming in bins-based inflation density forecasts.

Recommended citation: Boctor, Valerie R., Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber. On Eliciting Subjective Probability Distributions of Expectations. No. w32406. National Bureau of Economic Research, 2024.

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Fiscal Sources of Inflation Risk in EMDEs: the Role of the External Channel

Latest Version: July 12, 2023

We examine how changes in fiscal deficits affect near-term future inflation in a panel of emerging market and developing economies (EMDEs). Using a novel method for quantile panel regressions with fixed effects, we find that an increase in the fiscal deficit has highly non-linear effects on inflation - that is, a larger impact on upside tail risks than on average inflation. These effects are substantially larger in EMDEs than in advanced economies. We then show that an increase in the fiscal deficit raises the risk of future currency depreciation which magnifies the initial inflation response. This external channel is closely related to sovereign risk, being greater when the share of sovereign debt in foreign currency is large or when a sizeable share of sovereign debt is held by foreign residents. Finally, we find that the effects of fiscal deficits on future inflation are strongly attenuated in inflation targeting regimes and also influenced by constraints on monetary policy.

Recommended citation: Banerjee, Ryan, Valerie Boctor, Aaron N. Mehrotra, and Fabrizio Zampolli. Fiscal sources of inflation risk in EMDEs: the role of the external channel. Bank for International Settlements, Monetary and Economic Department, 2023.

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Fiscal Deficits and Inflation Risks: the Role of Fiscal and Monetary Regimes

Latest Version: June 23, 2023

Using data from a panel of advanced economies over four decades, we show that the inflationary effect of fiscal deficits crucially depends on the prevailing fiscal-monetary policy regime. Under a fiscally-led regime, defined as a regime in which the government does not adjust the primary balance to stabilise debt and the central bank is less independent or puts less emphasis on price stability, the average effect on inflation of higher deficits is found to be up to five times larger than under a monetary-led regime. Under a fiscally-led regime, higher deficits also increase the dispersion of possible future inflationary outcomes, especially the probability of high inflation. Based on forecasts from our model, the high inflation experienced by many countries during the recovery from the Covid-19 pandemic appears more consistent with a fiscally-led regime than a monetary-led regime.

Recommended citation: Banerjee, Ryan, Valerie Boctor, Aaron N. Mehrotra, and Fabrizio Zampolli. Fiscal deficits and inflation risks: the role of fiscal and monetary regimes. Bank for International Settlements, Monetary and Economic Department, 2022.

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