Essays on Credit Markets and the Macroeconomy

This dissertation consists of three essays that explore frictions in credit markets and their effects on the macroeconomy.;The first essay, "Forced Sales and House Prices," focuses on frictions in the housing and mortgage markets. We use data on house transactions in Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of the seller, are sold at lower prices than other houses. We quantify the magnitude of these discounts and explore the possible causes. The essay also studies the spillover effects of foreclosures on nearby houses, finding significant effects at the very local level: foreclosures that take place within a tenth of a mile of a house lower the price at which it is sold by about 1%.;The second essay, "Credit Default Swap Spreads and Systemic Financial Risk," presents a novel method to measure the joint default risk of large financial institutions using information in bond and credit default swap (CDS) prices. Bond prices reflect individual default probabilities of the issuers. From the spreads of CDSs written by a bank against another bank we can learn pairwise joint default risk, due to the presence of counterparty risk in these contracts. Since this information set does not fully characterize the joint default risk of many banks, I construct the tightest bounds on systemic risk consistent with this information. Using this methodology I track the evolution of joint default risk of large banks during the financial crisis.;In the third essay, "Intangible Capital, Relative Asset Shortages and Bubbles," we analyze an OLG economy with financial frictions in credit markets and accumulation of both physical and intangible capital. As intangible capital (which has limited use as collateral) becomes more important relative to physical capital in production, interest rates decline, and the economy faces an abundance of low-yield assets and a scarcity of high-yield ones. We show that this can create the conditions for the emergence of rational bubbles in developed economies. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, the standard tests of dynamic efficiency are not valid.