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Working Paper
Macroeconomic Effects of Banking Sector Losses across Structural Models
The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.
Working Paper
Financial capital and the macroeconomy: a quantitative framework
Financial intermediation transforms short-term liquid assets into long-term capital assets. As a result, risk taking, in the form of long-term commitments despite unresolved short-term funding risk, is an essential element of intermediation. If such funding risk must be addressed by costly recapitalization and/or distressed asset sales due to capital market frictions, an increase in uncertainty can cause a disruption in the intermediation process by forcing risk-neutral intermediaries to behave in a risk-averse manner. Our analysis examines this behavior theoretically and empirically. We ...
Working Paper
Optimal Monetary and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation
We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument ...
Working Paper
Misallocation and financial market frictions: some direct evidence from the dispersion in borrowing costs
Financial market frictions distort the allocation of resources among productive units?all else equal, firms whose financing choices are affected by financial frictions face higher borrowing costs than firms with ready access to capital markets. As a result, input choices may differ systematically across firms in ways that are unrelated to their productive efficiency. We propose a simple accounting framework that allows us to assess the empirical magnitude of the loss in aggregate resources due to such misallocation. To a second-order approximation, our accounting framework requires only ...
Working Paper
Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits
This paper uses the staggered changes of R&D tax credits across U.S. states and over time as a quasi-natural experiment to examine the impact of innovation on corporate liquidity. By generating plausibly independent variation in firms' incentive to invest in R&D, we are able to assess the empirical importance of specific theories of the link between innovation and corporate liquidity. Firms increase (decrease) their cash to asset ratios by about one and a half percentage point when their home state increases (cuts) R&D tax credits. These baseline difference-in-differences estimates hold up to ...
Working Paper
Inflation dynamics during the financial crisis
Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. The authors develop a model in which firms face financial frictions while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing ...
Working Paper
Financial capital and the macroeconomy: policy considerations
We develop a macroeconomic model in which the balance sheet/liquidity condition of financial institutions plays an important role in the determination of asset prices and economic activity. The financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing, forcing them to behave in a risk-averse manner. The model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals, causing aggregate investment and output to ...
Working Paper
The Macroeconomic Effects of Excess Savings
We study the consequences of shocks to the household wealth distribution in dynamic general equilibrium by characterizing the rate at which excess wealth is depleted. Analytical results link the aggregate decumulation rate to the distribution of the additional balances, micro intertemporal marginal propensities to consume, and general equilibrium feedback. A quantitative heterogeneous agent New Keynesian model matches the depletion path of the excess savings built up during the COVID-19 pandemic across the income distribution. The model predicts a substantial but steadily waning boost to ...