Housing Models with Risky Mortgages
 
 This project develops a model with housing and risky mortgages. The returns to housing are subject to aggregate and idiosyncratic risk. Mortgages are defaulted in equilibrium when housing returns are low. To capture recent events, we consider an increase in the riskiness of mortgages. An increase in mortgage risk raises default and generates a credit crunch and a recession.
 
 Alternative Mortgage Contracts
 
 The recent financial crisis and the ensuing recession have their roots in the bursting of the housing bubble in the United States. Academic and Policy discussion have pointed to a number of likely contributions to the housing bubble, among which the appearance of exotic mortgage products (interest only, negative amortization and pay option Adjustable-Rate Mortgages). These nonstandard mortgage products share a feature: the reduction in the initial monthly payments relative to conventional Fixed-Rate Mortgage contracts. this project finds that low early or even negative amortization increases the default rate and intensifies the negative effects of a housing risk shock on aggregate consumption and output.
 
 
 
 Boom-Bust Cycles in Housing Markets
 
 This project analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations on productivity and other shocks originating from the housing market, the credit market and the conduct of monetary policy. We find that expectations related to different sectors of the economy can generate booms in the housing market in accordance with empirical findings. Only expectations of future expansionary monetary policy that are not ful filled can generate a macroeconomic recession. Regarding the credit market, increased access to credit generates boom-bust cycles only if it is expected to be reversed in the near future.
 
 
 
 Monetary and Macro-prudential Policies in Boom-bust Cycles
 
 The recent financial crisis has demonstrates the need for a global macro-prudential approach to supervision and regulation of the financial sector. The projects analyzes the implementation and effectiveness of macro-prudential tools by evaluating policies that make the Loan to Value ratio respond to macroeconomic conditions and vary in a counter-cyclical manner. It finds that interest rate rules that respond to credit growth and countercyclical loan-to-value ratios reduce macroeconomic volatility and improve welfare relative to an estimated Taylor-type interest rate rule.
 
 
 The Role of Bank Capital
 
 The financing choice of financial institutions is a difficult one, as equity financing is costlier than short-term financing but, at the same time, bank capital is an essential cushion against adverse shocks. Since the return to bank equity is risky while the return to deposit is typically risk-free, savers require a premium for holding bank equity. During economic downturns the return to equity falls and savers experience a reduction of wealth and decrease the amount of deposits. They may require an even higher premium to hold bank equity. So, not only the value of bank equity goes down during downturns, but also it becomes even more difficult for bankers to raise additional equity. This might lead to a decline in loans that contracts the economy even further. This project develops a model for the financing decision of banks and the portfolio decision of savers. The goal is to analyze the effect of bank capital regulation (as required by Basel III) as well as recent bank recapitalization efforts during the financial crisis.
 
 
 
 A Macroeconomic Model of Global Banking
 
 The recent crisis has underlined the vulnerability to systemic risk of the Swiss economy, given its distinctively large financial sector compared to the size of the economy. International regulators stress the need for macro-prudential standards and tougher restrictions on capital adequacy and leverage ratios for its largest two banks, whose liability total about 600% of Switzerland’s GDP. At the same time, some Swiss banks have been severely affected by the U.S. sub-prime crisis and the subsequent freeze in the interbank market. This project plans to analyze bank regulation and policy options for economies with large financial sectors like Switzerland.