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Working Paper
Corporate Debt Maturity Matters for Monetary Policy
We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). ...
Working Paper
A Model of Endogenous Debt Maturity with Heterogeneous Beliefs
This paper studies optimal debt maturity in an economy with repayment enforcement frictions and investors disagree about repayment probabilities. The optimal debt maturity choice is a mix of long- and short-term debt securities. Spreading risky debt claims on cash flows over time allows debt to be priced by investors most willing to hold risk at each point in time, thereby increasing investment and output. By contrast, a single maturity, either all long- or short-term, will be priced by investors less willing to hold risk, which reduces investment and output. The model provides a novel ...
Working Paper
Long-Term Finance and Investment with Frictional Asset Markets
Trading frictions in financial markets affect more long- than short-term bonds generating an upward sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the US, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves ...
Report
Official Sovereign Debt
This paper studies sovereign debt from official lenders empirically and theoretically. We document that official sovereign debt is more than half of the total sovereign debt in emerging markets and tends to flow in during default episodes. We then develop a model in which a sovereign borrows from official and private lenders, can partially and selectively default on each, and faces bond prices that compensate for default losses. Official debt differs from private debt in that it is of longer duration and more concessional after a default. Default does not preclude borrowing, and episodes end ...