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Report
Allocation and Employment Effect of the Paycheck Protection Program
The Paycheck Protection Program (PPP) was a large and unprecedented small-business support program enacted as a response to the COVID-19 crisis in the United States. The PPP administered almost $800 billion in loans and grants to small businesses through the banking system. However, there is still limited consensus on its overall effect on employment. This paper explores why it is challenging to estimate the effect of the PPP. To do so, we first focus on the timing of the allocation of PPP funds across regions and firms. Counties less affected by COVID-19 and with a larger presence of ...
Working Paper
Government Banks and Interventions in Credit Markets
We study a large-scale quasi-experiment in the Brazilian banking sector characterized by an unexpected and macroeconomically relevant increase in lending by commercial government banks. Using credit registry data, we find that this intervention led to a reduction in lending rates, but it did not lead to a change in private banks’ credit supply. Firms reliant on government banks experienced a substantial increase in debt, and government banks faced a large increase in loan defaults driven by indebted firms. We find a small increase in employment at the firm level, suggesting limited direct ...
Working Paper
Corporate Finance and the Transmission of Shocks to the Real Economy
Credit availability from different sources varies greatly across firms and has firm-level effects on investment decisions and aggregate effects on output. We develop a theoretical framework in which firms decide endogenously at the extensive and intensive margins of different funding sources to study the role of firm choices on the transmission of credit supply shocks to the real economy. As in the data, firms can borrow from different banks, issue bonds, or raise equity through retained earnings to fund productive investment. Our model is calibrated to detailed firm- and loan-level data and ...
Report
Firms’ Cash Holdings and Monetary Policy Transmission
Liquidity, particularly cash holdings, may serve as an important cushion for firms to absorb macroeconomic shocks such as interest rate increases so that these shocks have only minimal effects on their operations, at least in the short term. For example, to finance their investments, firms with high levels of cash may not have to tap so deep into debt financing, the cost of which relates closely to interest rates. Understanding the role of corporate cash holdings is therefore paramount to formulating appropriate monetary policy in the current environment. This brief informs the ongoing policy ...
Working Paper
Optimal Allocation of Relief Funds: The Case of the Paycheck Protection Program
The Paycheck Protection Program (PPP) was a large and unprecedented small-business support program that allocated $800 billion in loans and grants to small businesses following the onset of the COVID-19 crisis. This paper explores the optimal allocation of funds across firms and the distortions caused by allocating these funds through banks. We show that it can be optimal to allocate funds to the least or most affected firms depending on the underlying distribution of the shock that firms face, the firms’ financial position, and the total budget available for the program. In the model, as ...
Working Paper
What Do 25 Million Records of Small Businesses Say about the Effects of the PPP?
We utilize Dun & Bradstreet data on firms’ financial condition to examine the allocation of Paycheck Protection Program (PPP) loans and their impact. Three main findings emerge. First, firms in better financial condition prior to the COVID outbreak were advantaged in the allocation of PPP loans. Second, firms’ financial condition improved significantly and persistently after receiving a loan, and this effect was more pronounced among the smaller and less financially sound firms. Third, we demonstrate empirically that the heterogeneity in firms’ financial condition must be accounted for ...
Report
Interest Expenses, Coverage Ratio, and Firm Distress
Historically, the pass-through of federal funds rate increases into firms’ interest expenses has been incomplete and delayed, with the peak responses occurring about one year after a policy rate increase. These findings indicate that current corporate interest rate expenses will continue to increase, even absent any additional rate hikes going forward. Higher interest expenses can lead to firm distress and defaults, which have adverse effects on employment and investment. These effects can be amplified through the financial accelerator channel.
Report
Is Post-pandemic Wage Growth Fueling Inflation?
Inflation in the United States surged after the onset of the COVID-19 pandemic, reaching levels not seen in four decades. Supply chain disruptions, extraordinary fiscal support for households, labor market shortages, and lockdowns and other public health measures contributed to this surge, which first manifested as goods price inflation. Nominal wage growth also increased significantly and has remained at levels above pre-pandemic averages, raising concerns that it could trigger a wage-price spiral and extend the current episode of high inflation. Indeed, the increase in wage growth has ...
Working Paper
Cost-Price Relationships in a Concentrated Economy
We use local projections with granular instrumental variables to estimate the aggregate pass-through of costs into prices and how it is affected by industry concentration. On average, we find, prices increase above trend growth for three quarters after an exogenous cost shock, and the price increase is accompanied by a decline in output. The estimated pass-through of the shock into prices one quarter ahead is 0.7. The price response to shocks becomes about 27 percent larger when there is an increase in concentration similar to the one observed over the last 20 years. This differential effect ...
Report
Cost-Price Relationships in a Concentrated Economy
The US economy is at least 50 percent more concentrated today than it was in 2005. In this paper, we estimate the effect of this increase on the pass-through of cost shocks into prices. Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. The resulting above-trend price growth lasts for about four quarters. Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current ...