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Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Kozlowski, Julian; Teeple, Keisuke (2023-05-02)
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

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

Working Paper
Aggregate Liquidity Management
Keister, Todd; Sanches, Daniel R. (2016-11-25)
It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit ...
Working Papers , Paper 16-32

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Kozlowski, Julian; Teeple, Keisuke (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

Working Paper
Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms
Xu, Lixin Colin; Cull, Robert; Sun, Bo; Li, Wei (2015-01-21)
We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak ...
International Finance Discussion Papers , Paper 1129

Working Paper
Firm Financial Conditions and the Transmission of Monetary Policy
Rogers, John; Ostry, Daniel; Ferreira, Thiago Revil T. (2023-05-31)
We study how the transmission of monetary policy to firms' investment and credit spreads depends on their financial conditions, finding a major role for their excess bond premia (EBPs), the component of credit spreads in excess of default risk. While monetary policy easing shocks compress credit spreads more for firms with higher ex-ante EBPs, it is lower-EBP firms that invest more. We rationalize these findings using a model with financial frictions in which lower-EBP firms have flatter marginal product of capital curves. We also show empirically that the cross-sectional distribution of firm ...
Finance and Economics Discussion Series , Paper 2023-037

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

Newsletter
The Rise of Intangible Investment and the Transmission of Monetary Policy
David, Joel M.; Gourio, François (2023-08)
Monetary policy acts on the economy primarily through its effects on investment spending. But the nature of investment has evolved over time: “Intangible assets”—such as intellectual property or software—play an increasingly important role in the modern economy. In this Chicago Fed Letter, we study the implications of this change for the transmission of monetary policy. We show that investment in intangible assets is less sensitive to interest rates than investment in tangible assets. This suggests that the secular shift toward intangibles has reduced the responsiveness of aggregate ...
Chicago Fed Letter , Volume no 482 , Pages 8

Working Paper
Micro- and Macroeconomic Impacts of a Place-Based Industrial Policy
Atalay, Enghin; Hortacsu, Ali; Runyun, Mustafa; Syverson, Chad; Ulu, Mehmet Faith (2023-06-13)
We investigate the impact of a set of place-based subsidies introduced in Turkey in 2012. Using firm-level balance-sheet data along with data on the domestic production network, we first assess the policy’s direct and indirect impacts. We find an increase in economic activity in industry-province pairs that were the focus of the subsidy program, and positive spillovers to the suppliers and customers of subsidized firms. With the aid of a dynamic multi-region, multi-industry general equilibrium model, we then assess the program’s impacts. Based on the calibrated model, we find that, in the ...
Working Papers , Paper 23-12

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Teeple, Keisuke; Kozlowski, Julian (2022-09-14)
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

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