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Working Paper
Zombies at Large? Corporate Debt Overhang and the Macroeconomy
Jordà, Òscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M. (2020-12-08)
With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when ...
Working Paper Series , Paper 2020-36

Working Paper
Sovereigns versus Banks: Credit, Crises, and Consequences
Taylor, Alan M.; Jordà, Òscar; Schularick, Moritz (2013)
Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms ...
Working Paper Series , Paper 2013-37

Working Paper
Bias in Local Projections
Johannsen, Benjamin K.; Herbst, Edward (2020-01-31)
Local projections (LPs) are a popular tool in applied macroeconomic research. We survey the related literature and find that LPs are often used with very small samples in the time dimension. With small sample sizes, given the high degree of persistence in most macroeconomic data, impulse responses estimated by LPs can be severely biased. This is true even if the right-hand-side variable in the LP is iid, or if the data set includes a large cross-section (i.e., panel data). We derive a simple expression to elucidate the source of the bias. Our expression highlights the interdependence between ...
Finance and Economics Discussion Series , Paper 2020-010

Working Paper
Decomposing the Fiscal Multiplier
Taylor, Alan M.; Jordà, Òscar; Cloyne, James (2020-03-27)
Unusual circumstances often coincide with unusual fiscal policy actions. Much attention has been paid to estimates of how fiscal policy affects the macroeconomy, but these are typically average treatment effects. In practice, the fiscal “multiplier” at any point in time depends on the monetary policy response. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to evaluate these monetary-fiscal effects. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on ...
Working Paper Series , Paper 2020-12

Working Paper
Estimating Hysteresis Effects
Furlanetto, Francesco; Lepetit, Antoine; Robstad, Ørjan; Rubio-Ramirez, Juan F.; Ulvedal, Pål (2021-11-09)
In this paper, we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the sample includes the Great Recession. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, although output per worker is largely unaffected. We find strong evidence that hysteresis transmits through a rise in long-term unemployment and a decline in labor force participation and disproportionately ...
FRB Atlanta Working Paper , Paper 2021-24

Working Paper
Assessing Macroeconomic Tail Risk
Matthes, Christian; Zhang, Donghai; Loria, Francesca (2019-04-19)
What drives macroeconomic tail risk? To answer this question, we borrow a definition of macroeconomic risk from Adrian et al. (2019) by studying (left-tail) percentiles of the forecast distribution of GDP growth. We use local projections (Jord, 2005) to assess how this measure of risk moves in response to economic shocks to the level of technology, monetary policy, and financial conditions. Furthermore, by studying various percentiles jointly, we study how the overall economic outlook?as characterized by the entire forecast distribution of GDP growth?shifts in response to shocks. We find that ...
Working Paper , Paper 19-10

Working Paper
When Do State-Dependent Local Projections Work?
Kilian, Lutz; Pesavento, Elena; Herrera, Ana María; Goncalves, Silvia (2022-05-06)
Many empirical studies estimate impulse response functions that depend on the state of the economy. Most of these studies rely on a variant of the local projection (LP) approach to estimate the state-dependent impulse response functions. Despite its widespread application, the asymptotic validity of the LP approach to estimating state-dependent impulse responses has not been established to date. We formally derive this result for a structural state-dependent vector autoregressive process. The model only requires the structural shock of interest to be identified. A sufficient condition for the ...
Working Papers , Paper 2205

Working Paper
Disasters Everywhere: The Costs of Business Cycles Reconsidered
Schularick, Moritz; Taylor, Alan M.; Jordà, Òscar (2020-03-31)
Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and ...
Working Paper Series , Paper 2020-11

Report
Zombies at Large? Corporate Debt Overhang and the Macroeconomy
Jordà, Òscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M. (2020-12-01)
With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near-universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when ...
Staff Reports , Paper 951

Working Paper
The Long-Run Effects of Monetary Policy
Singh, Sanjay R.; Taylor, Alan M.; Jordà, Òscar (2020-01-16)
Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can ...
Working Paper Series , Paper 2020-01

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