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Journal Article
Two Years into COVID, What’s the State of U.S. Businesses?
Paul, Pascal (2022-08-15)
More than two years after the outbreak of COVID-19, concerns remain that U.S. businesses are substantially more vulnerable and less productive than in the past. Using extensive data on private and public firms allows for a detailed assessment of these concerns. According to a number of performance measures, businesses borrowing from large U.S. banks appear relatively healthy, increased leverage is concentrated among safer companies rather than riskier ones, and probabilities of default are close to pre-crisis levels.
FRBSF Economic Letter , Volume 2022 , Issue 22 , Pages 6

Working Paper
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms
Ajello, Andrea; Boyarchenko, Nina; Gourio, François; Tambalotti, Andrea (2022-02-15)
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit ...
Finance and Economics Discussion Series , Paper 2022-005

Working Paper
Credit Supply and Hedge Fund Performance: Evidence from Prime Broker Surveys
Li, Dan; Monin, Phillip J.; Petrasek, Lubomir (2024-11-21)
Constraints on the supply of credit by prime brokers affect hedge funds' leverage and performance. Using dealer surveys and hedge fund regulatory filings, we identify individual funds' credit supply from the availability of credit under agreements currently in place between a hedge fund and its prime brokers. We find that hedge funds connected to prime brokers that make more credit available to their hedge fund clients increase their borrowing and generate higher returns and alphas. These effects are more pronounced among hedge funds that rely on a small number of prime brokers, and those ...
Finance and Economics Discussion Series , Paper 2024-089

Working Paper
Revisiting Gertler-Gilchrist Evidence on the Behavior of Small and Large Firms
Sanchez, Juan M.; Kudlyak, Marianna (2016-03-30)
Gertler and Gilchrist (1994) provide evidence for the prevailing view that adverse shocks are propagated via credit constraints of small firms. We revisit the behavior of small versus large firms during the episodes of credit disruption and recessions in the sample extended to cover the 2007-09 economic crisis. We find that large firms'' short-term debt and sales contracted relatively more than those of small firms during the 2007-09 episode. Furthermore, the short-term debt of large firms also contracted relatively more in the previous tight money episodes if one takes into account the ...
Working Papers , Paper 2016-5

Report
Endogenous Leverage and Default in the Laboratory
Houser, Daniel; Fostel, Ana; Cipriani, Marco (2019-11-01)
We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, leverage is endogenous: agents choose how much to borrow using a risky asset as collateral, and there are no ad hoc collateral constraints. When the risky asset is financial?namely, its payoff does not depend on ownership (such as a bond)? collateral requirements are high and there is no default. In contrast, when the risky asset is nonfinancial?namely, its payoff ...
Staff Reports , Paper 900

Report
Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges
Boyarchenko, Nina; Favara, Giovanni; Schularick, Moritz (2022-02-01)
This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in ...
Staff Reports , Paper 1003

Working Paper
The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework
Waggoner, Daniel F.; Hubrich, Kirstin (2022-06-02)
We conduct a novel empirical analysis of the role of leverage of financial institutions for the transmission of financial shocks to the macroeconomy. For that purpose, we develop an endogenous regime-switching structural vector autoregressive model with time-varying transition probabilities that depend on the state of the economy. We propose new identification techniques for regime switching models.Recently developed theoretical models emphasize the role of bank balance sheets for the build-up of financial instabilities and the amplification of financial shocks. We build a market-based ...
FRB Atlanta Working Paper , Paper 2022-5

Newsletter
How the U.S. Treasury Futures Market and the Basis Trade Could Be Affected by the Treasury Clearing Mandate: Part 2—The Possible Role of Cross-Margining
Patel, Ketan B. (2026-01)
In part 2 of this Chicago Fed Letter series, I delve further into the implications of the U.S. Securities and Exchange Commission’s (SEC) recent mandate requiring transactions for both U.S. Treasury cash securities and repurchase agreements (repos) to be cleared and settled through an authorized central counterparty (CCP). In part 1, I provided a primer on the Treasury futures market and the Treasury cash–futures basis trade and touched on the possible impact of the SEC mandate on both. Here, I explain in greater detail how the mandate could affect the cost and functioning of the basis ...
Chicago Fed Letter , Volume 517 , Pages 8

Working Paper
Leverage over the Firm Life Cycle, Firm Growth, and Aggregate Fluctuations
Hyatt, Henry; Kalemli-Özcan, Ṣebnem; Dinlersoz, Emin M.; Penciakova, Veronika (2019-11-01)
We study the leverage of U.S. firms over their life cycles and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new dataset that combines private and public firms' balance sheets with firm-level data from U.S. Census Bureau's Longitudinal Business Database for the period 2005-12. Public and private firms exhibit different leverage dynamics over their life cycles. Firm age and size are systematically related to leverage for private firms but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession and ...
FRB Atlanta Working Paper , Paper 2019-18

Working Paper
Understanding Bank and Nonbank Credit Cycles: A Structural Exploration
Zhong, Molin; Durdu, Bora (2019-05-03)
We explore the structural drivers of bank and nonbank credit cycles using an estimated medium-scale macro model that allows for bank and nonbank financial intermediation. We posit economy-wide aggregate and sectoral disturbances to potentially drive bank and nonbank credit growth. We find that sectoral shocks affecting the balance sheets of entrepreneurs who borrow from the financial sector are important for the business cycle frequency fluctuations in bank and nonbank credit growth. Economy-wide entrepreneurial risk shocks gain predominance for explaining the longer-horizon comovement ...
Finance and Economics Discussion Series , Paper 2019-031

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