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Working Paper
Credit Default Swaps in General Equilibrium: Spillovers, Credit Spreads, and Endogenous Default
Darst, Matt; Refayet, Ehraz (2016-04-19)
This paper highlights two new effects of credit default swap markets (CDS) in a general equilibrium setting. First, when firms' cash flows are correlated, CDSs impact the cost of capital{credit spreads{and investment for all firms, even those that are not CDS reference entities. Second, when firms internalize the credit spread changes, the incentive to issue safe rather than risky bonds is fundamentally altered. Issuing safe debt requires a transfer of profits from good states to bad states to ensure full repayment. Alternatively, issuing risky bonds maximizes profits in good states at the ...
Finance and Economics Discussion Series , Paper 2016-042

Newsletter
Economic Outlook Symposium: Summary of 2018 Results and 2019 Forecasts
Strauss, William A.; Sarussi, Kelley (2019)
According to participants in the Chicago Fed?s annual Economic Outlook Symposium (EOS), the U.S. economy is forecasted to grow at a pace somewhat above average in 2019, with inflation ticking down and the unemployment rate remaining low.
Chicago Fed Letter

Discussion Paper
Is the United States Relying on Foreign Investors to Fund Its Larger Budget Deficit?
Wang, Linda; Klitgaard, Thomas (2018-11-28)
The federal tax cut and the increase in federal spending at the beginning of 2018 substantially increased the government deficit, requiring a jump in the amount of Treasury securities needed to fund the gap. One question is whether the government will have to rely on foreign investors to buy these securities. Data for the first half of 2018 are available and, so far, the country has not had to increase the pace of borrowing from abroad. The current account balance, which measures how much the United States borrows from the rest of the world, has been essentially unchanged. Instead, the tax ...
Liberty Street Economics , Paper 20181128

Report
How much do bank shocks affect investment? Evidence from matched bank-firm loan data
Amiti, Mary; Weinstein, David E. (2013-03-01)
We show that supply-side financial shocks have a large impact on firms' investment. We do this by developing a new methodology to separate firm-borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, bank supply shocks?that is, movements in ...
Staff Reports , Paper 604

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Teeple, Keisuke; Kozlowski, Julian (2024-04-12)
This paper studies how trading frictions in financial markets impact firms’ investment and dividend policies, and explores its aggregate consequences. When equity shares trade in frictional asset markets, the firm’s problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms’ ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital. In contrast, if firms can commit, trading frictions affect asset prices but have little ...
Working Papers , Paper 2022-022

Working Paper
Capital goods trade and economic development
Ravikumar, B.; Mutreja, Piyusha; Sposi, Michael (2014-05-01)
Almost 80 percent of capital goods production in the world is concentrated in 10 countries. Poor countries import most of their capital goods. We argue that international trade in capital goods has quantitatively important effects on economic development through two channels: (i) capital formation and (ii) aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth model. Barriers to trade result in a misallocation of factors both within and across countries. We calibrate the model to bilateral trade flows, prices, and income per worker. Our model ...
Globalization Institute Working Papers , Paper 183

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Teeple, Keisuke; Kozlowski, Julian (2022-09-15)
This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but have ...
Working Papers , Paper 2022-022

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Teeple, Keisuke; Kozlowski, Julian (2023-05-22)
This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices, and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but ...
Working Papers , Paper 2022-022

Report
Structural Changes in Investment and the Waning Power of Monetary Policy
Bloesch, Justin; Weber, Jacob P. (2026-03-01)
We argue that secular change in both the production and composition of investment goods has weakened investment’s role in the transmission of monetary policy to labor earnings and consumption. We show analytically that fluctuations in the production of investment goods amplify the response of consumption to monetary policy shocks by varying labor income for hand-to-mouth agents. We document three secular changes weakening this channel: (i) labor’s share of value added in investment goods production has declined, (ii) the import share of investment goods has risen, and (iii) the ...
Staff Reports , Paper 1190

Report
Firms’ Cash Holdings and Monetary Policy Transmission
Bräuning, Falk; Fillat, José; Joaquim, Gustavo (2023-10-12)
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 ...
Current Policy Perspectives

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