Janice Eberly

Eberly, Janice C. and Arvind Krishnamurthy. 2014. Efficient Credit Policies in a Housing Debt Crisis. Brookings Papers on Economic Activity.

Consumption, income, and home prices fell simultaneously during the financial crisis, compounding recessionary conditions with liquidity constraints and mortgage distress. We develop a framework to guide government policy in response to a crisis, where government may intervene to support distressed mortgages. Our results emphasize three aspects of efficient mortgage modifications. First, when households are borrowing constrained, government resources should support household liquidity up-front. This implies loan modifications that reduce payments during the crisis, rather than using government resources to reduce payments over the life of the mortgage contract, such as via debt reduction. Second, while governments will not find it efficient to directly write down borrower debt, in many cases it will be in the best interest of lenders to write down debt. Reducing debt is effective in reducing strategic default. Lenders, who bear credit default risk, have a direct incentive to write down debt and avoid losses due to default. Finally, a well-designed mortgage contract should take these considerations into account, reducing payments during recessions and reducing debt when home prices fall. We propose an automatic stabilizer mortgage contract which does both, by refinancing mortgages into lower-rate adjustable rate mortgages when interest rates fall during a downturn -- reducing payments and lowering the present value of borrowers' debt.

Abel, Andrew B and Janice C. Eberly. 1997. An Exact Solution for the Investment and Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility. Journal of Economic Dynamics and Control. 21(4-5): 831-852.

This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental value of the firm.

Eberly, Janice C. and Jan A. Van Mieghem. 1997. Multifactor Dynamic Investment Under Uncertainty. Journal of Economic Theory. 75(8): 345-387.

We characterize a firm's optimal factor adjustment when any number of factors faced "kinked" linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment shoudl optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions.

Abel, Andrew B and Janice C. Eberly. 1996. Optimal Investment with Costly Reversibility. Review of Economic Studies. 63(4): 581-593.

Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibility under uncertainty and we extend the Jorgensonian concept of the user cost of capital to this case. We define and calculate cU and cL as the user cost of capital associated with the purchase and sale of capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [cL,cU]. This prescription encompasses the case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment.

Eberly, Janice C. and Arvind Krishnamurthy. 2014. Efficient Credit Policies in a Housing Debt Crisis. Brookings Papers on Economic Activity.

Consumption, income, and home prices fell simultaneously during the financial crisis, compounding recessionary conditions with liquidity constraints and mortgage distress. We develop a framework to guide government policy in response to a crisis, where government may intervene to support distressed mortgages. Our results emphasize three aspects of efficient mortgage modifications. First, when households are borrowing constrained, government resources should support household liquidity up-front. This implies loan modifications that reduce payments during the crisis, rather than using government resources to reduce payments over the life of the mortgage contract, such as via debt reduction. Second, while governments will not find it efficient to directly write down borrower debt, in many cases it will be in the best interest of lenders to write down debt. Reducing debt is effective in reducing strategic default. Lenders, who bear credit default risk, have a direct incentive to write down debt and avoid losses due to default. Finally, a well-designed mortgage contract should take these considerations into account, reducing payments during recessions and reducing debt when home prices fall. We propose an automatic stabilizer mortgage contract which does both, by refinancing mortgages into lower-rate adjustable rate mortgages when interest rates fall during a downturn -- reducing payments and lowering the present value of borrowers' debt.

Abel, Andrew B and Janice C. Eberly. 1997. An Exact Solution for the Investment and Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility. Journal of Economic Dynamics and Control. 21(4-5): 831-852.

This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental value of the firm.

Eberly, Janice C. and Jan A. Van Mieghem. 1997. Multifactor Dynamic Investment Under Uncertainty. Journal of Economic Theory. 75(8): 345-387.

We characterize a firm's optimal factor adjustment when any number of factors faced "kinked" linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment shoudl optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions.

Abel, Andrew B and Janice C. Eberly. 1996. Optimal Investment with Costly Reversibility. Review of Economic Studies. 63(4): 581-593.

Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibility under uncertainty and we extend the Jorgensonian concept of the user cost of capital to this case. We define and calculate cU and cL as the user cost of capital associated with the purchase and sale of capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [cL,cU]. This prescription encompasses the case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment.