Working Paper

Cross-Sectional Financial Conditions, Business Cycles and The Lending Channel

Abstract: I document business cycle properties of the full cross-sectional distributions of U.S. stock returns and credit spreads from financial and nonfinancial firms. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for lending conditions. SRF also affects firm-level investment beyond firms' balance sheets, and adverse SRF shocks lead to macroeconomic downturns with tighter lending conditions in vector autoregressions (VARs). These results are consistent with a lending channel in which cross-sectional financial firms' balance sheets play a prominent role in business cycles. I rationalize this argument with a model that matches the VAR evidence.

Keywords: Cross-Sectional; Skewness; Business Cycles; Lending Channel;

JEL Classification: E32; E37; E44;

https://doi.org/10.17016/IFDP.2022.1335

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2022-02-04

Number: 1335