Joao F. Gomes

Role of financial markets and institutions in the macroeconomy.

Dynamic quantitative models of the macroeconomy with financial frictions

Fundamental determinants of corporate investment and financing.

Economic fundamentals, asset pricing and credit risk.

Linkages between financial markets and monetary and fiscal policies.

• Joao F. Gomes (Working), The Macroeconomic Implications of Corporate Income Taxes.
• Joao F. Gomes, Marco Grotteria, Jessica Wachter (2023), Foreseen Risks, Journal of Economic Theory, 212 (). Abstract

  Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value varies over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

  Related
  Links

  Working Paper version
• Joao F. Gomes and Sergey Sarkisyan, Monetary Policy and Financial Stability.
• Joao F. Gomes (Under Review), Marginal q.
• Ulrich Doraszelski, Joao F. Gomes, Felix Nockher, Oligopoly dynamics with Financing Frictions.
• Joao F. Gomes, Colin Ward, M Yasser Boualam (Under Review), Understanding the Behavior of Distressed Stocks. Description
  We construct an asset pricing model with explicit default to develop a risk-based source of the distress anomaly. We show that distress produces sharply countercyclical betas leading to biased estimates of risk premia and alphas. This eect is amplied when earnings growth is mean-reverting, so that distressed stocks also have high ex- pected future earnings. This bias can account for between 39 and 76 percent of the distress anomaly in a calibrated economy that replicates the key characteristics of these stocks.
• Joao F. Gomes and Lukas Schmid (2020), Equilibrium Asset Pricing with Leverage and Default, Journal of Finance. Abstract
  We develop a general equilibrium model linking the pricing of stocks and corporate bonds to endogenous movements in corporate leverage and aggregate volatility. The model has heterogeneous firms making optimal investment and financing decisions and connects fluctuations in macroeconomic quantities and asset prices to movements in the cross-section of firms. Empirically plausible movements in leverage produce realistic asset return dynamics. Countercyclical leverage drives predictable variation in risk premia, and debt-financed growth generates a high value premium. Endogenous default produces countercyclical aggregate volatility and credit spread movements that are propagated to the real economy through their effects on investment and output.
• Vito Gala, Joao F. Gomes, Tong Liu (2019), Investment without Q, Journal of Monetary Economics. Abstract

  Policy functions summarize the key predictions of any dynamic investment model. They are easy to estimate and account for a large fraction of the variation in corporate investment. Estimated policy functions can also be used estimate deep parameters of a structural model of investment. Variance decomposition of empirical investment equations can be used to identify the key state variables in structural models.

  Description
  Policy functions summarize the key predictions of any dynamic investment model. They are easy to estimate and account for a large fraction of the variation in corporate investment. Estimated policy functions can also be used estimate deep parameters of a structural model of investment. Variance decomposition of empirical investment equations can be used to identify the key state variables in structural models.
• Joao F. Gomes, Marco Grotteria, Jessica Wachter (2019), Cyclical Dispersion in Expected Defaults, Review of Financial Studies, 32 (4), pp. 1275-1308. Abstract

  A growing literature shows that credit indicators forecast aggregate real outcomes. While the literature has proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.

  Related
  Links

  Review of Financial Studies
• Joao F. Gomes, Urban Jermann, Lukas Schmid (2016), Sticky Leverage, American Economic Review, 2016. Abstract
  We develop a tractable general equilibrium model that captures the interplay

  between nominal long-term corporate debt, inflation, and real aggregates. We

  show that unanticipated inflation changes the real burden of debt and, more

  significantly, leads to a debt overhang that distorts future investment and

  production decisions. For these effects to be both large and very persistent

  it is essential that debt maturity exceeds one period. We also show that

  interest rate rules can help stabilize our economy.
• All Research from Joao F. Gomes »

Monetary Economics and the Macroeconomy (Wharton Undergraduate students)

Macroeconomics and the Global Economy (Wharton MBA students)

Finance in Europe (Wharton MBA students)

Topics on Macro Finance; Intertemporal Macroeconomics (Doctoral students).

Sessions on the Global Economic Outlook; US and Eurozone Monetary Policy; Outlook for Financial Markets (Wharton Executive Education)

Current Courses

• FNCE7400 - Central Banks, Macroeconomic Policy And Financial Markets

  Understanding and predicting central banking decision making and behavior is crucial for all market participants from asset managers and traders to private consumers. This course aims to provide the methods and knowledge on how central banks and governments think and implement policies to reach the goals of price and financial stability as well as support of growth and employment. The core of the course connects between the legal and actual goals that central banks follow and the related economic analysis on which these goals and policies are set. We explain the economic rationale for the policy prescriptions to reach the goals and how these policies are actually implemented by the Federal Reserve Bank (Fed) in the US, the European Central Bank (ECB), Bank of Israel (BOI) and some remarks on other countries. We use data, current events since 2007 as the basis for discussion and assignments. The second half of the class discusses the implications of these policies for equity and bond valuations. Students will be asked to forecast live policy decisions and implied market valuations.

  FNCE7400001 ( Syllabus )

  FNCE7400002 ( Syllabus )

• FNCE9370 - Topics In Macro Finance

  This is an advanced course in quantitative theory applied to macro and finance models. It is intended for doctoral students in finance, economics and related fields. The course focuses on four broad theoretical literatures: (i) firm investment and growth; (ii) corporate, household and sovereign debt; (iii) asset pricing in general equilibrium; and (iv) equilibrium macro models with a financial sector. My approach is to develop and discuss in detail a unified framework that is suited to address most topics, usually covering a few central topics and the core papers. We then discuss the more recent literature, highlighting how authors combine and expand upon the core ideas. This part of the course usually relies on regular student presentations.

  FNCE9370001 ( Syllabus )

Past Courses

• AMCS5999 - Independent Study

  Independent Study allows students to pursue academic interests not available in regularly offered courses. Students must consult with their academic advisor to formulate a project directly related to the student’s research interests. All independent study courses are subject to the approval of the AMCS Graduate Group Chair.

• AMCS9999 - Ind Study & Research

  Study under the direction of a faculty member.

• FNCE2400 - Central Banks, Markets

  Understanding and predicting central banking decision making and behavior is crucial for all market participants from asset managers and traders to private consumers. This course aims to provide the methods and knowledge on how central banks and governments think and implement policies to reach the goals of price and financial stability as well as support of growth and employment. The core of the course connects between the legal and actual goals that central banks follow and the related economic analysis on which these goals and policies are set. We explain the economic rationale for the policy prescriptions to reach the goals and how these policies are actually implemented by the Federal Reserve Bank (Fed) in the US, the European Central Bank (ECB), Bank of Israel (BOI) and some remarks on other countries. We use data, current events of the 2007-2018 period as the basis for discussion and assignments. All of these are aimed understanding how and why the Fed, the ECB and the BOI set their policies. For each we shall simulate in class current decisions based on assignment related to past policies and the theory presented in class.

• FNCE3990 - Independent Study

  Integrates the work of the various courses and familiarizes the student with the tools and techniques of research.

• FNCE6130 - Macroecn & Global Econom

  This course is required for all students except those who, having prior training in macroeconomics, money and banking, and stabilization policy at an intermediate or advanced level, can obtain a waiver by passing an examination. The purpose of the course is to train students to think systematically about the current state of the economy and macroeconomic policy, and to be able to evaluate the economic environment within which business and financial decisions are made. The course emphasizes the use of economic theory to understand the workings of financial markets and the operation and impact of government policies. We will study the determinants of the level of national income, employment, investment, interest rates, the supply of money, inflation, exchange rates, and the formulation and operation of stabilization policies.

• FNCE7400 - Central Banks, Macro, Markets

  Understanding and predicting central banking decision making and behavior is crucial for all market participants from asset managers and traders to private consumers. This course aims to provide the methods and knowledge on how central banks and governments think and implement policies to reach the goals of price and financial stability as well as support of growth and employment. The core of the course connects between the legal and actual goals that central banks follow and the related economic analysis on which these goals and policies are set. We explain the economic rationale for the policy prescriptions to reach the goals and how these policies are actually implemented by the Federal Reserve Bank (Fed) in the US, the European Central Bank (ECB), Bank of Israel (BOI) and some remarks on other countries. We use data, current events since 2007 as the basis for discussion and assignments. The second half of the class discusses the implications of these policies for equity and bond valuations. Students will be asked to forecast live policy decisions and implied market valuations.

• FNCE8960 - Global Modular Course

  Open to MBA, Executive MBA and Undergraduate students, these modular courses are intended to provide unique educational experiences to students in a regional context that has particular resonance with the topic. Taught around the globe, the modular courses help us enrich the curriculum and research on our own campuses in Philadelphia and San Francisco.

• FNCE8990 - Independent Study

  Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. Applications for FNCE 8990 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. ISP's must be supervised by a Standing Faculty member of the Finance Department.

• FNCE9240 - Intertemporal Macro Fin

  This is a doctoral level course on macroeconomics, with special emphasis on intertemporal choice under uncertainty and topics related to finance. Topics include: optimal consumption and saving, the stochastic growth model, q-theory of investment, (incomplete) risk sharing and asset pricing. The course will cover and apply techniques, including dynamic programming, to solve dynamic optimization problems under uncertainty. Numerical solution methods are also discussed.

• FNCE9370 - Topics in Macro Finance

  This is an advanced course in quantitative theory applied to macro and finance models. It is intended for doctoral students in finance, economics and related fields. The course focuses on four broad theoretical literatures: (i) firm investment and growth; (ii) corporate, household and sovereign debt; (iii) asset pricing in general equilibrium; and (iv) equilibrium macro models with a financial sector. My approach is to develop and discuss in detail a unified framework that is suited to address most topics, usually covering a few central topics and the core papers. We then discuss the more recent literature, highlighting how authors combine and expand upon the core ideas. This part of the course usually relies on regular student presentations.

• Marshall Blume Prize for Excellence in Financial Research, 2018
• Western Finance Association Award for Best Paper in Investment Management, 2017
• Smith Breeden First Prize for Best Asset Pricing Paper Published in the Journal of Finance, 2010
• Crowell First Prize, Best Quantitative Work, PanAgora Asset Management, 2007
• Brattle Prize Nomination, Best Corporate Finance Paper Published in the Journal of Finance, 2004
• Kaplan Memorial Prize for excellent scholarship - University of Rochester, 1994
• Banco of Portugal Award, First Prize for Highest Undergraduate Average In Economics, 1991

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