Debt Covenants and the Macroeconomy: The Interest Coverage Channel

Size: px
Start display at page:

Download "Debt Covenants and the Macroeconomy: The Interest Coverage Channel"

Transcription

1 Debt Covenants and the Macroeconomy: The Interest Coverage Channel Daniel L. Greenwald MIT Sloan EFA Lunch, April 19 Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

2 Introduction Non-residential investment is a key driver of monetary policy response. - Natural link: $6T corporate debt market. - Large body of work on transmission through credit limits ( financial accelerator ). Firm credit limits typically modeled as limit on market leverage. - But actual covenants in debt contracts quite different from this stylized model. - Lian and Ma (17): importance of earnings based constraints. - But many covenants depend on more than earnings, firms often have several at once. Research question: how does firm credit limit structure influence macro dynamics? - Focus on Interest Coverage (IC) covenants that cap ratio of interest payments to earnings. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 / 6

3 This Paper Approach: combine structural model with firm-level empirical evidence. Stylized Facts: Interest Coverage covenants extremely common (seen in 84% of firms in DealScan sample with covenants), maximum ratios appear stable over time. Main Finding #1: Interest Coverage covenants amplify interest rate transmission. - Much stronger responses of debt, investment, output than under alternative covenant types. - Reason: directly shifted by interest rates. - Rates 1bp = extra 6.3% 8Q asset growth in data (4.4% in model). Main Finding #: Combination of interest coverage + other cov. = state dependence. - Whether interest coverage is tightest covenant determined by interest rate. - Stronger transmission when rates are already high (and IC covenants likely to bind). - High vs. low rates: 1bp = extra 4.9% 8Q asset growth in data (1.5% in model). Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 3 / 6

4 This Paper Approach: combine structural model with firm-level empirical evidence. Stylized Facts: Interest Coverage covenants extremely common (seen in 84% of firms in DealScan sample with covenants), maximum ratios appear stable over time. Main Finding #1: Interest Coverage covenants amplify interest rate transmission. - Much stronger responses of debt, investment, output than under alternative covenant types. - Reason: directly shifted by interest rates. - Rates 1bp = extra 6.3% 8Q asset growth in data (4.4% in model). Main Finding #: Combination of interest coverage + other cov. = state dependence. - Whether interest coverage is tightest covenant determined by interest rate. - Stronger transmission when rates are already high (and IC covenants likely to bind). - High vs. low rates: 1bp = extra 4.9% 8Q asset growth in data (1.5% in model). Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 3 / 6

5 This Paper Approach: combine structural model with firm-level empirical evidence. Stylized Facts: Interest Coverage covenants extremely common (seen in 84% of firms in DealScan sample with covenants), maximum ratios appear stable over time. Main Finding #1: Interest Coverage covenants amplify interest rate transmission. - Much stronger responses of debt, investment, output than under alternative covenant types. - Reason: directly shifted by interest rates. - Rates 1bp = extra 6.3% 8Q asset growth in data (4.4% in model). Main Finding #: Combination of interest coverage + other cov. = state dependence. - Whether interest coverage is tightest covenant determined by interest rate. - Stronger transmission when rates are already high (and IC covenants likely to bind). - High vs. low rates: 1bp = extra 4.9% 8Q asset growth in data (1.5% in model). Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 3 / 6

6 Background: Debt Covenants Covenants provide conditions that, if violated by the firm, allow lender to demand immediate repayment. - Often set thresholds for financial ratios = debt limits. - Applies to entire firm s statistics, not limited to individual loan. - Violation typically leads to (costly) renegotiation, but for today treat as hard caps. Three main types: 1. Interest Coverage (IC): restrict interest payments fraction θ IC of earnings (EBITDA).. Debt/Earnings (DE): restrict stock of debt fraction θ DE of earnings (EBITDA). 3. Leverage: restrict stock of debt fraction θ LEV of firm book value. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 4 / 6

7 Simple Example of Interest Rate Transmission Consider firm with EBITDA $1M, max ratio of interest payments to EBITDA of 4%. - Max interest payment is $4M. - At 1% interest rate, firm can borrow up to $4M /.1 = $4M without violating. - If rates fall to 9%, firm can now borrow $4M /.9 = $44.4M, an increase of 11% This high sensitivity holds even if firm uses only fixed-rate debt. - In this case, relevant interest rate is rate on new fixed rate debt. If firm already holds floating rate debt, amount of new debt firm can take on without violating even more sensitive. - If firm already has $M at same floating rate (1%), can borrow addl. $M without violating. - After fall in rates, old debt only contributes $1.8M toward interest cap, can borrow $.M /.9 = $4.4M, increase of %. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

8 Simple Example of Interest Rate Transmission Consider firm with EBITDA $1M, max ratio of interest payments to EBITDA of 4%. - Max interest payment is $4M. - At 1% interest rate, firm can borrow up to $4M /.1 = $4M without violating. - If rates fall to 9%, firm can now borrow $4M /.9 = $44.4M, an increase of 11% This high sensitivity holds even if firm uses only fixed-rate debt. - In this case, relevant interest rate is rate on new fixed rate debt. If firm already holds floating rate debt, amount of new debt firm can take on without violating even more sensitive. - If firm already has $M at same floating rate (1%), can borrow addl. $M without violating. - After fall in rates, old debt only contributes $1.8M toward interest cap, can borrow $.M /.9 = $4.4M, increase of %. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

9 Simple Example of Interest Rate Transmission Consider firm with EBITDA $1M, max ratio of interest payments to EBITDA of 4%. - Max interest payment is $4M. - At 1% interest rate, firm can borrow up to $4M /.1 = $4M without violating. - If rates fall to 9%, firm can now borrow $4M /.9 = $44.4M, an increase of 11% This high sensitivity holds even if firm uses only fixed-rate debt. - In this case, relevant interest rate is rate on new fixed rate debt. If firm already holds floating rate debt, amount of new debt firm can take on without violating even more sensitive. - If firm already has $M at same floating rate (1%), can borrow addl. $M without violating. - After fall in rates, old debt only contributes $1.8M toward interest cap, can borrow $.M /.9 = $4.4M, increase of %. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

10 Covenant Prevalence by Type Plot: share with each covenant type for firms with at least one DealScan covenant. Share with Interest Coverage high and stable over time Interest Cov. Share Debt/Earnings Share Leverage Share Source: DealScan. Shares are equally weighted among DealScan firms with at least one covenant. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 6 / 6

11 Covenant Ratios Over Time Complication: covenant limits are endogenously set. Do lenders dynamically adjust simple covenants to achieve more complex debt policies? 5.5 Wtd. By Sales 5. Wtd. By Deal Amount (a) Min Interest Cov. Ratio 1 Wtd. By Sales Wtd. By Deal Amount (b) Max Debt/Earnings Ratio Source: DealScan, Compustat. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 7 / 6

12 Covenant Ratios Over Time Below: initial covenant ratios at origination in DealScan. Appear noisy but stable over time. - Note: Min Interest Cov. Ratio = EBITDA / payment. 5.5 Wtd. By Sales 5. Wtd. By Deal Amount (a) Min Interest Cov. Ratio 1 Wtd. By Sales Wtd. By Deal Amount (b) Max Debt/Earnings Ratio Source: DealScan, Compustat. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 7 / 6

13 Covenant Ratios Over Time Second check: maximum ratios on new loans stable even when underlying aggregate economic ratios move Min. Interest Cov. Corp NF Profit / Pay 7 Max. Debt/EBITDA Corp NF Debt/Profit (a) Min Interest Cov. Ratio (b) Max Debt/Earnings Ratio Source: DealScan, Compustat, NIPA, Flow of Funds. Covenant limits are weighted by deal amount. Debt payments assume 6bp spread over 3-Month Treasury. Min. Interest Cov. is the min. allowed Earnings / Interest ratio. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 8 / 6

14 Covenant Ratios Over Time Now look at all active covenants. Provide stable constraints even as variables move Min. Interest Cov. Corp NF Profit / Pay (a) Min Interest Cov. Ratio 7.5 Max. Debt/EBITDA Corp NF Debt/Profit (b) Max Debt/Earnings Ratio Source: DealScan, Compustat, NIPA, Flow of Funds. Covenant limits are weighted by deal amount. Debt payments assume 6bp spread over 3-Month Treasury. Min. Interest Cov. is the min. allowed Earnings / Interest ratio. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 9 / 6

15 Covenant Ratios Over Time Takeaway: covenants have structural meaning, reasonable to consider as fixed limits at business cycle frequency Min. Interest Cov. Corp NF Profit / Pay (a) Min Interest Cov. Ratio 7.5 Max. Debt/EBITDA Corp NF Debt/Profit (b) Max Debt/Earnings Ratio Source: DealScan, Compustat, NIPA, Flow of Funds. Covenant limits are weighted by deal amount. Debt payments assume 6bp spread over 3-Month Treasury. Min. Interest Cov. is the min. allowed Earnings / Interest ratio. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 9 / 6

16 Firm Characteristics by Covenant Firms with covenants larger, more levered than firms without covenants/syndicated loans. None IC DE Lev IC + DE IC + Lev DE + Lev Sales EBITDA Assets PPE Debt ST Debt LT Debt Cash Debt/EBITDA Debt/Assets Market-to-Book N 184,75 69,84 56,78 36,96 51,8 7,56 16,36 Source: Dealscan, Compustat. Additional Groupings Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

17 Firm Characteristics by Covenant Firms with IC covenants generally similar to firms with DE covenants. Firms with Leverage covenants a bit smaller. None IC DE Lev IC + DE IC + Lev DE + Lev Sales EBITDA Assets PPE Debt ST Debt LT Debt Cash Debt/EBITDA Debt/Assets Market-to-Book N 184,75 69,84 56,78 36,96 51,8 7,56 16,36 Source: Dealscan, Compustat. Additional Groupings Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

18 Model Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

19 Model Overview Demographics and preferences - Risk-neutral representative household consumes and provides labor. - Interest rate variation = time varying discount factor: log β t = (1 ρ β ) log β + ρβ t 1 + ε β,t. - Representative firm owns capital and pays dividends to household. Productive technology: f (K t 1, N t ) = Z t K α t 1 N1 α t Firm capital structure: - Risk-free floating rate debt at rate r t, interest is tax deductible (tax shield). - Dividend adjustment costs (financing frictions) following Jermann and Quadrini (1). - Combined: pathway from debt limits debt investment. Flexible prices and wages, monetary authority targets (and achieves) constant inflation. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

20 Model Overview Demographics and preferences - Risk-neutral representative household consumes and provides labor. - Interest rate variation = time varying discount factor: log β t = (1 ρ β ) log β + ρβ t 1 + ε β,t. - Representative firm owns capital and pays dividends to household. Productive technology: f (K t 1, N t ) = Z t K α t 1 N1 α t Firm capital structure: - Risk-free floating rate debt at rate r t, interest is tax deductible (tax shield). - Dividend adjustment costs (financing frictions) following Jermann and Quadrini (1). - Combined: pathway from debt limits debt investment. Flexible prices and wages, monetary authority targets (and achieves) constant inflation. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

21 Model Overview Demographics and preferences - Risk-neutral representative household consumes and provides labor. - Interest rate variation = time varying discount factor: log β t = (1 ρ β ) log β + ρβ t 1 + ε β,t. - Representative firm owns capital and pays dividends to household. Productive technology: f (K t 1, N t ) = Z t K α t 1 N1 α t Firm capital structure: - Risk-free floating rate debt at rate r t, interest is tax deductible (tax shield). - Dividend adjustment costs (financing frictions) following Jermann and Quadrini (1). - Combined: pathway from debt limits debt investment. Flexible prices and wages, monetary authority targets (and achieves) constant inflation. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

22 Model Overview Demographics and preferences - Risk-neutral representative household consumes and provides labor. - Interest rate variation = time varying discount factor: log β t = (1 ρ β ) log β + ρβ t 1 + ε β,t. - Representative firm owns capital and pays dividends to household. Productive technology: f (K t 1, N t ) = Z t K α t 1 N1 α t Firm capital structure: - Risk-free floating rate debt at rate r t, interest is tax deductible (tax shield). - Dividend adjustment costs (financing frictions) following Jermann and Quadrini (1). - Combined: pathway from debt limits debt investment. Flexible prices and wages, monetary authority targets (and achieves) constant inflation. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

23 Representative Firm s Problem Rep. firm chooses dividends D t, labor demand N t, new debt B t and the investment rate i t to maximize V F (K t 1, B t 1 ) = Ψ(D t ) + E t [ Λt+1 V F (K t, B t ) ] where concave Ψ(D t ) represents adjustment costs for dividends, Λ t+1 is the household SDF, subject to the budget constraint ) D t = (1 τ) (f (K t 1, N t ) w t N t } {{ } after-tax profit (1 τ)r t πt 1 B t 1 }{{} interest payment and the borrowing constraint (debt covenants). Household s Problem + τδk }{{ t 1 } depreciation credit i t K }{{ t 1 } investment ) B t πt 1 B t 1 ( + } {{ } net principal Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

24 Covenant Implementations Denote EBITDA by X t = f (K t 1, N t ) w t N t. Covenant types: 1. Interest Coverage: B IC t = θic X t r t.. Debt/Earnings: B DE t = θ DE X t. 3. Leverage: B LEV t = θ LEV BV t 1 θ LEV K t 1. Only interest coverage directly shifted by interest rates. - Highly sensitive, elasticity of B IC to rates is 1. Overall debt limit is smoothed to allow for e.g., annual financial statistics: B t ρ B t + (1 ρ)πt 1 B t 1 Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

25 Collateralizability Debt limits are mechanically sensitive to interest rates under IC covenants. What about transmission into real investment? Optimality condition: [ q t = Ω t + M }{{}}{{} t E t (1 + r t ) ] B t+1 K t Tobin s q Value of CFs }{{} Collateral Benefit Key object is collateralizability of investment: B t+1 / K t : B IC t K t = θic f K,t+1 r t+1, B DE t K t = θ DE f K,t+1, B LEV t K t = θ LEV. All covenants are collateralizable, but only IC collateralizability varies with interest rate. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

26 Calibration For today, no capital adjustment costs, isoelastic (power) dividend smoothing. Parameter Name Value Internal Target/Source Discount factor mean β.986 N 6% real rate Discount factor persistence ρ β.99 N Autocorrelation of 3-Mo T-Bill Labor disutility scale η 1.7 Y N SS = 1 Tax rate τ.35 N Corporate tax rate Inflation rate π 1.5 N % inflation Capital share α.36 N Standard Depreciation δ.5 N Standard Dividend cost elasticity ζ D 1. N Moderate smoothing Borrowing limit smoothing ρ B.5 N Annualized ratios Max interest coverage ratio θ IC.18 Y Book leverage = 1/3 in IC economy Max debt-to-earnings ratio θ DE Y Book leverage = 1/3 in DE economy Max Leverage ratio θ LEV.338 Y Book leverage = 1/3 in Lev. economy Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

27 Results Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

28 Comparison: Covenant Types Main Result #1: Interest Coverage covenants amplify interest rate transmission. Compare linearized IRF to 1bp disc. rate shock in economies each with single constraint. Debt IRF to Discount Rate Capital 6 4 Interest Cov. Debt/EBITDA Leverage IRF to Discount Rate Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

29 Comparison: Covenant Types IC economy: large relaxation of debt limits = capital, EBITDA growth = feedback. Additional 8Q growth of debt (14.1%), capital (4.4%), output (4.4%) relative to DE economy. Debt IRF to Discount Rate Capital 6 4 Interest Cov. Debt/EBITDA Leverage IRF to Discount Rate Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

30 Empirical Evidence: Covenant Types Regression on merged Compustat (investment, debt) + DealScan (loan covenants) data: Percent of Assetst y i,t+h = α i + φ ind,t + I cov,t (β,cov + β 1,cov r t ) + γ X t 1 + δ (X t 1 r t ) + ε i,t cov Debt Interest Coverage Percent of Assetst Assets Interest Coverage Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. MP Shocks Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

31 Empirical Evidence: Covenant Types Industry-time fixed effects control for endogeneity of interest rate. Larger responses to rates 1bp for firms with Interest Coverage covenants. Percent of Assetst Debt Interest Coverage Percent of Assetst Assets Interest Coverage Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. MP Shocks Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April / 6

32 Empirical Evidence: Covenant Types Challenge: firms with no covenants differ from IC firms on observables. Better comparison: firms with DE covenants. These show no increased response. Percent of Assetst Debt Interest Coverage Other Covenant Percent of Assetst Assets Interest Coverage Other Covenant Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 / 6

33 Empirical Evidence: Covenant Types Formal comparison: estimate β 1,IC β 1,DE. Estimate: higher 8Q debt growth (.7%), asset growth (6.3%) for IC relative to DE covenant. Percent of Assetst Debt IC - Other Percent of Assetst Assets IC - Other Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

34 Multiple Covenants Previous analysis considers economies with a single covenant at a time. Data: most firms with any covenants have both Interest Coverage + Debt/Earnings DE + IC Share DE + Lev Share IC + Lev Share Source: DealScan. Shares are equally weighted among DealScan firms with at least one covenant. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 / 6

35 Implementation: Debt/Earnings + Interest Coverage Covenant Assume common Debt/Earnings limit θ DE, but each firm i faces idiosyncratic IC limit: θ IC i,t = e i,t θ IC, e i,t iid Γ e Timing: - Firm re-draws e i,t each time it takes on new debt. - Must choose capital before it knows its draw of e i,t. ( ) Overall debt limit: B i,t = min B IC i,t, B DE i,t. Calibrate σ e to match IQR of θ DE i,t /θic i,t in DealScan data (σ e =.31). Calibrate θ IC, θ DE to match that 47% have tighter IC at steady state. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 3 / 6

36 State Dependence Whether Interest Coverage vs. Debt/Earnings is tighter uniquely determined by rates. - IC binds r t r i,t θic i,t / θ DE Share IC Tighter Date Source: DealScan, Compustat, equally weighted. Assumed interest rate is 6bp spread over the 3-Month T-Bill. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 4 / Mo Treasury 4 3 1

37 State Dependence DealScan data: substantial variation in implied fraction with IC as tighter covenant. Share IC Tighter Date Source: DealScan, Compustat, equally weighted. Assumed interest rate is 6bp spread over the 3-Month T-Bill. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 4 / Mo Treasury 4 3 1

38 State Dependence: DE + IC Covenants Main Result #: Combining IC + DE covs = state dependent interest rate transmission. Alternative regimes with SS interest (discount) rate high (+5bp) vs. low (-5bp). 7.5 IRF to Discount Rate 3 Low Rates Hybrid DE/IC High Rates IRF to Discount Rate Debt 5..5 Capital Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

39 State Dependence: DE + IC Covenants Stronger transmission when rates are high (79% IC binds) vs. low (8% IC binds). Additional 8Q growth in debt (6.%), capital (1.5%) in high vs. low rate regime. 7.5 IRF to Discount Rate 3 Low Rates Hybrid DE/IC High Rates IRF to Discount Rate Debt 5..5 Capital Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

40 Empirics: State Dependence Augment original regression so coefficients depend on interest rate regime (cutoff = 3.5%): y i,t+h = α i + φ ind,t + s {hi, low} } ( ) I s,t { I cov,t β s,cov + βs 1,cov r t + γ sx t 1 + δ s(x t 1 r t ) + ε i,t cov Percent of Assetst Debt Hi - Low (Both) Percent of Assetst Assets Hi - Low (Both) Source: DealScan, Compustat. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. The sample spans 1997Q1 to 7Q4. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 6 / 6

41 Empirics: State Dependence Increased 8Q growth in debt (4.4%), assets (4.9%) in high vs. low rate environment. Stronger response in high vs. low rate regime (despite smaller proportional change). Percent of Assetst Debt Hi - Low (Both) Percent of Assetst Assets Hi - Low (Both) Source: DealScan, Compustat. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. The sample spans 1997Q1 to 7Q4. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 6 / 6

42 Empirics: State Dependence No state dependent response for firms with IC covenant only. Percent of Assetst Debt Hi - Low (IC) Percent of Assetst Assets Hi - Low (IC) Source: DealScan, Compustat. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. The sample spans 1997Q1 to 7Q4. D/E Diff-in-Diff Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 7 / 6

43 Conclusion Novel model capturing key facts about corporate debt limits. - Interest Coverage limits are extremely common, caps stable over time. - Typical firm has multiple covenants. Main results: - Interest Coverage covenants amplify interest rate transmission. - State dependent transmission: stronger when rates are high. - Findings supported by firm-level data. Next steps: - Improved empirics, breakdowns by firm/debt characteristics. - More realistic firm profile, violation risk instead of hard caps. - Scraping EDGAR data. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 8 / 6

44 Monetary Policy Shocks Replace r t with identified MP shocks following Gertler and Karadi (1) Percent of Assetst Debt IC - Other Percent of Assetst Assets IC - Other Source: DealScan, Compustat. Dark bands indicate 67% confidence bands, while light bands indicate 95% confidence bands. Standard errors are clustered at the firm level. The sample spans 1997Q1 to 7Q4. Back Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6

45 Empirics: State Dependence No state dependent response for firms with IC covenant only. Percent of Assetst Debt Hi - Lo (DE) Percent of Assetst Assets Hi - Lo (DE) Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 / 6

46 Empirics: State Dependence Difference in difference (high vs. low, both covenants vs. IC only). Percent of Assetst Debt Diff-in-Diff (Both vs. IC) Percent of Assetst Assets Diff-in-Diff (Both vs. IC) Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Back Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 3 / 6

47 Empirics: State Dependence Difference in difference (high vs. low, both covenants vs. DE only). Percent of Assetst Debt Diff-in-Diff (vs. DE) Percent of Assetst Assets Diff-in-Diff (vs. DE) Source: DealScan, Compustat. The sample spans 1997Q1 to 7Q4. Back Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 4 / 6

48 Representative Household s Problem Rep. household chooses consumption C t, labor supply N t and new debt B t to maximize subject to the budget constraint C t = Ψ(D t ) }{{} dividends V H (B t 1 ) = u(c t ) v(n t ) + βe t [ V H (B t ) ] + (1 τ)w t N t + r t πt 1 }{{} labor income B t 1 }{{} interest payment ( ) Bt πt 1 B t 1 }{{} net debt issuance + T S t }{{} transfer Back Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 5 / 6

49 Firm Characteristics by Covenant: Additional Groupings None IC Non-IC IC Only DE Only Lev Only Sales EBITDA Assets PPE Debt ST Debt LT Debt Cash Debt/EBITDA Debt/Assets Market-to-Book N 184,75 69,84 13,86 5,76 3,83 7,53 Source: Dealscan, Compustat. Back Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 6 / 6

Taxing Firms Facing Financial Frictions

Taxing Firms Facing Financial Frictions Taxing Firms Facing Financial Frictions Daniel Wills 1 Gustavo Camilo 2 1 Universidad de los Andes 2 Cornerstone November 11, 2017 NTA 2017 Conference Corporate income is often taxed at different sources

More information

Macroprudential Policies in a Low Interest-Rate Environment

Macroprudential Policies in a Low Interest-Rate Environment Macroprudential Policies in a Low Interest-Rate Environment Margarita Rubio 1 Fang Yao 2 1 University of Nottingham 2 Reserve Bank of New Zealand. The views expressed in this paper do not necessarily reflect

More information

State Dependency of Monetary Policy: The Refinancing Channel

State Dependency of Monetary Policy: The Refinancing Channel State Dependency of Monetary Policy: The Refinancing Channel Martin Eichenbaum, Sergio Rebelo, and Arlene Wong May 2018 Motivation In the US, bulk of household borrowing is in fixed rate mortgages with

More information

Monetary Economics. Financial Markets and the Business Cycle: The Bernanke and Gertler Model. Nicola Viegi. September 2010

Monetary Economics. Financial Markets and the Business Cycle: The Bernanke and Gertler Model. Nicola Viegi. September 2010 Monetary Economics Financial Markets and the Business Cycle: The Bernanke and Gertler Model Nicola Viegi September 2010 Monetary Economics () Lecture 7 September 2010 1 / 35 Introduction Conventional Model

More information

Growth Opportunities, Investment-Specific Technology Shocks and the Cross-Section of Stock Returns

Growth Opportunities, Investment-Specific Technology Shocks and the Cross-Section of Stock Returns Growth Opportunities, Investment-Specific Technology Shocks and the Cross-Section of Stock Returns Leonid Kogan 1 Dimitris Papanikolaou 2 1 MIT and NBER 2 Northwestern University Boston, June 5, 2009 Kogan,

More information

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach Gianluca Benigno 1 Andrew Foerster 2 Christopher Otrok 3 Alessandro Rebucci 4 1 London School of Economics and

More information

Lorant Kaszab (MNB) Roman Horvath (IES)

Lorant Kaszab (MNB) Roman Horvath (IES) Aleš Maršál (NBS) Lorant Kaszab (MNB) Roman Horvath (IES) Modern Tools for Financial Analysis and ing - Matlab 4.6.2015 Outline Calibration output stabilization spending reversals Table : Impact of QE

More information

Quantitative Significance of Collateral Constraints as an Amplification Mechanism

Quantitative Significance of Collateral Constraints as an Amplification Mechanism RIETI Discussion Paper Series 09-E-05 Quantitative Significance of Collateral Constraints as an Amplification Mechanism INABA Masaru The Canon Institute for Global Studies KOBAYASHI Keiichiro RIETI The

More information

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014 External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory Ali Shourideh Wharton Ariel Zetlin-Jones CMU - Tepper November 7, 2014 Introduction Question: How

More information

How Effectively Can Debt Covenants Alleviate Financial Agency Problems?

How Effectively Can Debt Covenants Alleviate Financial Agency Problems? How Effectively Can Debt Covenants Alleviate Financial Agency Problems? Andrea Gamba Alexander J. Triantis Corporate Finance Symposium Cambridge Judge Business School September 20, 2014 What do we know

More information

Household Debt, Financial Intermediation, and Monetary Policy

Household Debt, Financial Intermediation, and Monetary Policy Household Debt, Financial Intermediation, and Monetary Policy Shutao Cao 1 Yahong Zhang 2 1 Bank of Canada 2 Western University October 21, 2014 Motivation The US experience suggests that the collapse

More information

Private Leverage and Sovereign Default

Private Leverage and Sovereign Default Private Leverage and Sovereign Default Cristina Arellano Yan Bai Luigi Bocola FRB Minneapolis University of Rochester Northwestern University Economic Policy and Financial Frictions November 2015 1 / 37

More information

A Small Open Economy DSGE Model for an Oil Exporting Emerging Economy

A Small Open Economy DSGE Model for an Oil Exporting Emerging Economy A Small Open Economy DSGE Model for an Oil Exporting Emerging Economy Iklaga, Fred Ogli University of Surrey f.iklaga@surrey.ac.uk Presented at the 33rd USAEE/IAEE North American Conference, October 25-28,

More information

A Model with Costly-State Verification

A Model with Costly-State Verification A Model with Costly-State Verification Jesús Fernández-Villaverde University of Pennsylvania December 19, 2012 Jesús Fernández-Villaverde (PENN) Costly-State December 19, 2012 1 / 47 A Model with Costly-State

More information

Inflation Dynamics During the Financial Crisis

Inflation Dynamics During the Financial Crisis Inflation Dynamics During the Financial Crisis S. Gilchrist 1 1 Boston University and NBER MFM Summer Camp June 12, 2016 DISCLAIMER: The views expressed are solely the responsibility of the authors and

More information

Financial Amplification, Regulation and Long-term Lending

Financial Amplification, Regulation and Long-term Lending Financial Amplification, Regulation and Long-term Lending Michael Reiter 1 Leopold Zessner 2 1 Instiute for Advances Studies, Vienna 2 Vienna Graduate School of Economics Barcelona GSE Summer Forum ADEMU,

More information

How Costly is External Financing? Evidence from a Structural Estimation. Christopher Hennessy and Toni Whited March 2006

How Costly is External Financing? Evidence from a Structural Estimation. Christopher Hennessy and Toni Whited March 2006 How Costly is External Financing? Evidence from a Structural Estimation Christopher Hennessy and Toni Whited March 2006 The Effects of Costly External Finance on Investment Still, after all of these years,

More information

Credit Frictions and Optimal Monetary Policy. Vasco Curdia (FRB New York) Michael Woodford (Columbia University)

Credit Frictions and Optimal Monetary Policy. Vasco Curdia (FRB New York) Michael Woodford (Columbia University) MACRO-LINKAGES, OIL PRICES AND DEFLATION WORKSHOP JANUARY 6 9, 2009 Credit Frictions and Optimal Monetary Policy Vasco Curdia (FRB New York) Michael Woodford (Columbia University) Credit Frictions and

More information

Macroprudential Policy Implementation in a Heterogeneous Monetary Union

Macroprudential Policy Implementation in a Heterogeneous Monetary Union Macroprudential Policy Implementation in a Heterogeneous Monetary Union Margarita Rubio University of Nottingham ECB conference on "Heterogenity in currency areas and macroeconomic policies" - 28-29 November

More information

Risky Mortgages in a DSGE Model

Risky Mortgages in a DSGE Model 1 / 29 Risky Mortgages in a DSGE Model Chiara Forlati 1 Luisa Lambertini 1 1 École Polytechnique Fédérale de Lausanne CMSG November 6, 21 2 / 29 Motivation The global financial crisis started with an increase

More information

A Policy Model for Analyzing Macroprudential and Monetary Policies

A Policy Model for Analyzing Macroprudential and Monetary Policies A Policy Model for Analyzing Macroprudential and Monetary Policies Sami Alpanda Gino Cateau Cesaire Meh Bank of Canada November 2013 Alpanda, Cateau, Meh (Bank of Canada) ()Macroprudential - Monetary Policy

More information

The Risky Steady State and the Interest Rate Lower Bound

The Risky Steady State and the Interest Rate Lower Bound The Risky Steady State and the Interest Rate Lower Bound Timothy Hills Taisuke Nakata Sebastian Schmidt New York University Federal Reserve Board European Central Bank 1 September 2016 1 The views expressed

More information

How Much Insurance in Bewley Models?

How Much Insurance in Bewley Models? How Much Insurance in Bewley Models? Greg Kaplan New York University Gianluca Violante New York University, CEPR, IFS and NBER Boston University Macroeconomics Seminar Lunch Kaplan-Violante, Insurance

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 March 218 1 The views expressed in this paper are those of the authors

More information

ECON 4325 Monetary Policy and Business Fluctuations

ECON 4325 Monetary Policy and Business Fluctuations ECON 4325 Monetary Policy and Business Fluctuations Tommy Sveen Norges Bank January 28, 2009 TS (NB) ECON 4325 January 28, 2009 / 35 Introduction A simple model of a classical monetary economy. Perfect

More information

Inflation Dynamics During the Financial Crisis

Inflation Dynamics During the Financial Crisis Inflation Dynamics During the Financial Crisis S. Gilchrist 1 R. Schoenle 2 J. W. Sim 3 E. Zakrajšek 3 1 Boston University and NBER 2 Brandeis University 3 Federal Reserve Board Theory and Methods in Macroeconomics

More information

Financial intermediaries in an estimated DSGE model for the UK

Financial intermediaries in an estimated DSGE model for the UK Financial intermediaries in an estimated DSGE model for the UK Stefania Villa a Jing Yang b a Birkbeck College b Bank of England Cambridge Conference - New Instruments of Monetary Policy: The Challenges

More information

Investment, Financial Frictions and the Dynamic Effects of Monetary Policy

Investment, Financial Frictions and the Dynamic Effects of Monetary Policy Investment, Financial Frictions and the Dynamic Effects of Monetary Policy James Cloyne Clodo Ferreira Maren Froemel Paolo Surico UC, Davis Bank of Spain London Business School & BoE ESCB Research Cluster

More information

Economic stability through narrow measures of inflation

Economic stability through narrow measures of inflation Economic stability through narrow measures of inflation Andrew Keinsley Weber State University Version 5.02 May 1, 2017 Abstract Under the assumption that different measures of inflation draw on the same

More information

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity Aubhik Khan The Ohio State University Tatsuro Senga The Ohio State University and Bank of Japan Julia K. Thomas The Ohio

More information

A Model with Costly Enforcement

A Model with Costly Enforcement A Model with Costly Enforcement Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) Costly-Enforcement December 25, 2012 1 / 43 A Model with Costly

More information

2. Preceded (followed) by expansions (contractions) in domestic. 3. Capital, labor account for small fraction of output drop,

2. Preceded (followed) by expansions (contractions) in domestic. 3. Capital, labor account for small fraction of output drop, Mendoza (AER) Sudden Stop facts 1. Large, abrupt reversals in capital flows 2. Preceded (followed) by expansions (contractions) in domestic production, absorption, asset prices, credit & leverage 3. Capital,

More information

Optimal Credit Market Policy. CEF 2018, Milan

Optimal Credit Market Policy. CEF 2018, Milan Optimal Credit Market Policy Matteo Iacoviello 1 Ricardo Nunes 2 Andrea Prestipino 1 1 Federal Reserve Board 2 University of Surrey CEF 218, Milan June 2, 218 Disclaimer: The views expressed are solely

More information

Risk-Adjusted Capital Allocation and Misallocation

Risk-Adjusted Capital Allocation and Misallocation Risk-Adjusted Capital Allocation and Misallocation Joel M. David Lukas Schmid David Zeke USC Duke & CEPR USC Summer 2018 1 / 18 Introduction In an ideal world, all capital should be deployed to its most

More information

flow-based borrowing constraints and macroeconomic fluctuations

flow-based borrowing constraints and macroeconomic fluctuations flow-based borrowing constraints and macroeconomic fluctuations Thomas Drechsel (LSE) Annual Congress of the EEA University of Cologne 27 August 2018 in a nutshell I What do the dynamics of firm borrowing

More information

Credit and hiring. Vincenzo Quadrini University of Southern California, visiting EIEF Qi Sun University of Southern California.

Credit and hiring. Vincenzo Quadrini University of Southern California, visiting EIEF Qi Sun University of Southern California. Credit and hiring Vincenzo Quadrini University of Southern California, visiting EIEF Qi Sun University of Southern California November 14, 2013 CREDIT AND EMPLOYMENT LINKS When credit is tight, employers

More information

Leverage and Capital Utilization

Leverage and Capital Utilization Leverage and Capital Utilization HAMILTON GALINDO Arizona State University September, 18 ABSTRACT I document the cyclical relationship between capital structure and capital utilization of US firms. Capital

More information

Why are Banks Exposed to Monetary Policy?

Why are Banks Exposed to Monetary Policy? Why are Banks Exposed to Monetary Policy? Sebastian Di Tella and Pablo Kurlat Stanford University Bank of Portugal, June 2017 Banks are exposed to monetary policy shocks Assets Loans (long term) Liabilities

More information

A Model of Financial Intermediation

A Model of Financial Intermediation A Model of Financial Intermediation Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) A Model of Financial Intermediation December 25, 2012 1 / 43

More information

Bank Capital Requirements: A Quantitative Analysis

Bank Capital Requirements: A Quantitative Analysis Bank Capital Requirements: A Quantitative Analysis Thiên T. Nguyễn Introduction Motivation Motivation Key regulatory reform: Bank capital requirements 1 Introduction Motivation Motivation Key regulatory

More information

Credit Frictions and Optimal Monetary Policy

Credit Frictions and Optimal Monetary Policy Credit Frictions and Optimal Monetary Policy Vasco Cúrdia FRB New York Michael Woodford Columbia University Conference on Monetary Policy and Financial Frictions Cúrdia and Woodford () Credit Frictions

More information

Self-fulfilling Recessions at the ZLB

Self-fulfilling Recessions at the ZLB Self-fulfilling Recessions at the ZLB Charles Brendon (Cambridge) Matthias Paustian (Board of Governors) Tony Yates (Birmingham) August 2016 Introduction This paper is about recession dynamics at the ZLB

More information

On the Merits of Conventional vs Unconventional Fiscal Policy

On the Merits of Conventional vs Unconventional Fiscal Policy On the Merits of Conventional vs Unconventional Fiscal Policy Matthieu Lemoine and Jesper Lindé Banque de France and Sveriges Riksbank The views expressed in this paper do not necessarily reflect those

More information

Efficient Bailouts? Javier Bianchi. Wisconsin & NYU

Efficient Bailouts? Javier Bianchi. Wisconsin & NYU Efficient Bailouts? Javier Bianchi Wisconsin & NYU Motivation Large interventions in credit markets during financial crises Fierce debate about desirability of bailouts Supporters: salvation from a deeper

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 September 218 1 The views expressed in this paper are those of the

More information

Reserve Requirements and Optimal Chinese Stabilization Policy 1

Reserve Requirements and Optimal Chinese Stabilization Policy 1 Reserve Requirements and Optimal Chinese Stabilization Policy 1 Chun Chang 1 Zheng Liu 2 Mark M. Spiegel 2 Jingyi Zhang 1 1 Shanghai Jiao Tong University, 2 FRB San Francisco ABFER Conference, Singapore

More information

Household Saving, Financial Constraints, and the Current Account Balance in China

Household Saving, Financial Constraints, and the Current Account Balance in China Household Saving, Financial Constraints, and the Current Account Balance in China Ayşe İmrohoroğlu USC Marshall Kai Zhao Univ. of Connecticut Facing Demographic Change in a Challenging Economic Environment-

More information

Country Spreads as Credit Constraints in Emerging Economy Business Cycles

Country Spreads as Credit Constraints in Emerging Economy Business Cycles Conférence organisée par la Chaire des Amériques et le Centre d Economie de la Sorbonne, Université Paris I Country Spreads as Credit Constraints in Emerging Economy Business Cycles Sarquis J. B. Sarquis

More information

Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19

Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19 Credit Crises, Precautionary Savings and the Liquidity Trap (R&R Quarterly Journal of nomics) October 31, 2016 Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal

More information

The Tail that Wags the Economy: Belief-driven Business Cycles and Persistent Stagnation

The Tail that Wags the Economy: Belief-driven Business Cycles and Persistent Stagnation The Tail that Wags the Economy: Belief-driven Business Cycles and Persistent Stagnation Julian Kozlowski Laura Veldkamp Venky Venkateswaran NYU NYU Stern NYU Stern June 215 1 / 27 Introduction The Great

More information

Debt Constraints and the Labor Wedge

Debt Constraints and the Labor Wedge Debt Constraints and the Labor Wedge By Patrick Kehoe, Virgiliu Midrigan, and Elena Pastorino This paper is motivated by the strong correlation between changes in household debt and employment across regions

More information

Reserve Requirements and Optimal Chinese Stabilization Policy 1

Reserve Requirements and Optimal Chinese Stabilization Policy 1 Reserve Requirements and Optimal Chinese Stabilization Policy 1 Chun Chang 1 Zheng Liu 2 Mark M. Spiegel 2 Jingyi Zhang 1 1 Shanghai Jiao Tong University, 2 FRB San Francisco 2nd Ann. Bank of Canada U

More information

Asset-price driven business cycle and monetary policy

Asset-price driven business cycle and monetary policy Asset-price driven business cycle and monetary policy Vincenzo Quadrini University of Southern California, CEPR and NBER June 11, 2007 VERY PRELIMINARY Abstract This paper studies the stabilization role

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state

More information

Fiscal Multipliers and Financial Crises

Fiscal Multipliers and Financial Crises Fiscal Multipliers and Financial Crises Miguel Faria-e-Castro New York University June 20, 2017 1 st Research Conference of the CEPR Network on Macroeconomic Modelling and Model Comparison 0 / 12 Fiscal

More information

Concerted Efforts? Monetary Policy and Macro-Prudential Tools

Concerted Efforts? Monetary Policy and Macro-Prudential Tools Concerted Efforts? Monetary Policy and Macro-Prudential Tools Andrea Ferrero Richard Harrison Benjamin Nelson University of Oxford Bank of England Rokos Capital 20 th Central Bank Macroeconomic Modeling

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 Instructions: Read the questions carefully and make sure to show your work. You

More information

Booms and Banking Crises

Booms and Banking Crises Booms and Banking Crises F. Boissay, F. Collard and F. Smets Macro Financial Modeling Conference Boston, 12 October 2013 MFM October 2013 Conference 1 / Disclaimer The views expressed in this presentation

More information

International Banks and the Cross-Border Transmission of Business Cycles 1

International Banks and the Cross-Border Transmission of Business Cycles 1 International Banks and the Cross-Border Transmission of Business Cycles 1 Ricardo Correa Horacio Sapriza Andrei Zlate Federal Reserve Board Global Systemic Risk Conference November 17, 2011 1 These slides

More information

Idiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective

Idiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective Idiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective Alisdair McKay Boston University March 2013 Idiosyncratic risk and the business cycle How much and what types

More information

Unemployment Fluctuations and Nominal GDP Targeting

Unemployment Fluctuations and Nominal GDP Targeting Unemployment Fluctuations and Nominal GDP Targeting Roberto M. Billi Sveriges Riksbank 3 January 219 Abstract I evaluate the welfare performance of a target for the level of nominal GDP in the context

More information

Consumer Bankruptcy: A Fresh Start

Consumer Bankruptcy: A Fresh Start Consumer Bankruptcy: A Fresh Start Igor Livshits, James MacGee, Michèle Tertilt (2007) presented by Nawid Siassi January 23, 2013 January 23, 2013 1 / 15 Motivation United States vs. Europe: very different

More information

Graduate Macro Theory II: The Basics of Financial Constraints

Graduate Macro Theory II: The Basics of Financial Constraints Graduate Macro Theory II: The Basics of Financial Constraints Eric Sims University of Notre Dame Spring Introduction The recent Great Recession has highlighted the potential importance of financial market

More information

Consumption and House Prices in the Great Recession: Model Meets Evidence

Consumption and House Prices in the Great Recession: Model Meets Evidence Consumption and House Prices in the Great Recession: Model Meets Evidence Greg Kaplan Kurt Mitman Gianluca Violante MFM 9-10 March, 2017 Outline 1. Overview 2. Model 3. Questions Q1: What shock(s) drove

More information

The Global Rise of Corporate Saving

The Global Rise of Corporate Saving The Global Rise of Corporate Saving Peter Chen Loukas Karabarbounis Brent Neiman University of Chicago University of Minnesota University of Chicago January 2017 This paper 1 Global rise of corporate saving

More information

Oil Price Uncertainty in a Small Open Economy

Oil Price Uncertainty in a Small Open Economy Yusuf Soner Başkaya Timur Hülagü Hande Küçük 6 April 212 Oil price volatility is high and it varies over time... 15 1 5 1985 199 1995 2 25 21 (a) Mean.4.35.3.25.2.15.1.5 1985 199 1995 2 25 21 (b) Coefficient

More information

A Structural Model of Continuous Workout Mortgages (Preliminary Do not cite)

A Structural Model of Continuous Workout Mortgages (Preliminary Do not cite) A Structural Model of Continuous Workout Mortgages (Preliminary Do not cite) Edward Kung UCLA March 1, 2013 OBJECTIVES The goal of this paper is to assess the potential impact of introducing alternative

More information

Heterogeneous Firm, Financial Market Integration and International Risk Sharing

Heterogeneous Firm, Financial Market Integration and International Risk Sharing Heterogeneous Firm, Financial Market Integration and International Risk Sharing Ming-Jen Chang, Shikuan Chen and Yen-Chen Wu National DongHwa University Thursday 22 nd November 2018 Department of Economics,

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Northwestern University and NBER December 2013 He and Krishnamurthy (Chicago, Northwestern)

More information

Bank Capital Buffers in a Dynamic Model 1

Bank Capital Buffers in a Dynamic Model 1 Bank Capital Buffers in a Dynamic Model 1 Jochen Mankart 1 Alex Michaelides 2 Spyros Pagratis 3 1 Deutsche Bundesbank 2 Imperial College London 3 Athens University of Economics and Business November 217

More information

Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model

Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model Bundesbank and Goethe-University Frankfurt Department of Money and Macroeconomics January 24th, 212 Bank of England Motivation

More information

Overborrowing, Financial Crises and Macro-prudential Policy. Macro Financial Modelling Meeting, Chicago May 2-3, 2013

Overborrowing, Financial Crises and Macro-prudential Policy. Macro Financial Modelling Meeting, Chicago May 2-3, 2013 Overborrowing, Financial Crises and Macro-prudential Policy Javier Bianchi University of Wisconsin & NBER Enrique G. Mendoza Universtiy of Pennsylvania & NBER Macro Financial Modelling Meeting, Chicago

More information

Asset purchase policy at the effective lower bound for interest rates

Asset purchase policy at the effective lower bound for interest rates at the effective lower bound for interest rates Bank of England 12 March 2010 Plan Introduction The model The policy problem Results Summary & conclusions Plan Introduction Motivation Aims and scope The

More information

Leverage Restrictions in a Business Cycle Model

Leverage Restrictions in a Business Cycle Model Leverage Restrictions in a Business Cycle Model Lawrence J. Christiano Daisuke Ikeda Disclaimer: The views expressed are those of the authors and do not necessarily reflect those of the Bank of Japan.

More information

The test has 13 questions. Answer any four. All questions carry equal (25) marks.

The test has 13 questions. Answer any four. All questions carry equal (25) marks. 2014 Booklet No. TEST CODE: QEB Afternoon Questions: 4 Time: 2 hours Write your Name, Registration Number, Test Code, Question Booklet Number etc. in the appropriate places of the answer booklet. The test

More information

. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO)

. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO) ....... Social Security Actuarial Balance in General Equilibrium S. İmrohoroğlu (USC) and S. Nishiyama (CBO) Rapid Aging and Chinese Pension Reform, June 3, 2014 SHUFE, Shanghai ..... The results in this

More information

The Collateralizability Premium

The Collateralizability Premium The Collateralizability Premium Hengjie Ai 1, Jun Li 2, Kai Li 3, and Christian Schlag 2 1 University of Minnesota 2 Goethe University Frankfurt and SAFE 3 Hong Kong University of Science and Technology

More information

1. Borrowing Constraints on Firms The Financial Accelerator

1. Borrowing Constraints on Firms The Financial Accelerator Part 7 1. Borrowing Constraints on Firms The Financial Accelerator The model presented is a modifed version of Jermann-Quadrini (27). Earlier papers: Kiyotaki and Moore (1997), Bernanke, Gertler and Gilchrist

More information

Land-Price Dynamics and Macroeconomic Fluctuations

Land-Price Dynamics and Macroeconomic Fluctuations Land-Price Dynamics and Macroeconomic Fluctuations Zheng Liu, Pengfei Wang, and Tao Zha; Econometrica (2013) UC3M Macro Reading Group - Discussion by Omar Rachedi 28 May 2014 Land price and business investment

More information

Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions

Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions A. Notarpietro S. Siviero Banca d Italia 1 Housing, Stability and the Macroeconomy: International Perspectives Dallas Fed

More information

Convergence of Life Expectancy and Living Standards in the World

Convergence of Life Expectancy and Living Standards in the World Convergence of Life Expectancy and Living Standards in the World Kenichi Ueda* *The University of Tokyo PRI-ADBI Joint Workshop January 13, 2017 The views are those of the author and should not be attributed

More information

The Employment and Output Effects of Short-Time Work in Germany

The Employment and Output Effects of Short-Time Work in Germany The Employment and Output Effects of Short-Time Work in Germany Russell Cooper Moritz Meyer 2 Immo Schott 3 Penn State 2 The World Bank 3 Université de Montréal Social Statistics and Population Dynamics

More information

Quantitative Tightening

Quantitative Tightening Quantitative Tightening Vadim Elenev Johns Hopkins Carey Miguel Faria-e-Castro FRB St. Louis Daniel L. Greenwald MIT Sloan January 5, 2019, ASSA/AEA Atlanta The views expressed on this paper do not necessarily

More information

Fiscal Multipliers in Recessions. M. Canzoneri, F. Collard, H. Dellas and B. Diba

Fiscal Multipliers in Recessions. M. Canzoneri, F. Collard, H. Dellas and B. Diba 1 / 52 Fiscal Multipliers in Recessions M. Canzoneri, F. Collard, H. Dellas and B. Diba 2 / 52 Policy Practice Motivation Standard policy practice: Fiscal expansions during recessions as a means of stimulating

More information

The Mortgage Credit Channel of Macroeconomic Transmission

The Mortgage Credit Channel of Macroeconomic Transmission The Mortgage Credit Channel of Macroeconomic Transmission Daniel L. Greenwald (MIT Sloan) Macro Financial Modeling Winter 217 Meeting March 1, 217 Daniel L. Greenwald (MIT Sloan) The Mortgage Credit Channel

More information

Foreign Competition and Banking Industry Dynamics: An Application to Mexico

Foreign Competition and Banking Industry Dynamics: An Application to Mexico Foreign Competition and Banking Industry Dynamics: An Application to Mexico Dean Corbae Pablo D Erasmo 1 Univ. of Wisconsin FRB Philadelphia June 12, 2014 1 The views expressed here do not necessarily

More information

Rental Markets and the Effects of Credit Conditions on House Prices

Rental Markets and the Effects of Credit Conditions on House Prices Rental Markets and the Effects of Credit Conditions on House Prices Daniel Greenwald 1 Adam Guren 2 1 MIT Sloan 2 Boston University AEA Meetings, January 2019 Daniel Greenwald, Adam Guren Rental Markets

More information

The Transmission of Monetary Policy through Redistributions and Durable Purchases

The Transmission of Monetary Policy through Redistributions and Durable Purchases The Transmission of Monetary Policy through Redistributions and Durable Purchases Vincent Sterk and Silvana Tenreyro UCL, LSE September 2015 Sterk and Tenreyro (UCL, LSE) OMO September 2015 1 / 28 The

More information

Asset Prices and Business Cycles with. Financial Frictions

Asset Prices and Business Cycles with. Financial Frictions Asset Prices and Business Cycles with Financial Frictions Pedram Nezafat Ctirad Slavík November 21, 2009 Job Market Paper Abstract. Existing dynamic general equilibrium models have failed to explain the

More information

Unconventional Monetary Policy

Unconventional Monetary Policy Unconventional Monetary Policy Mark Gertler (based on joint work with Peter Karadi) NYU October 29 Old Macro Analyzes pre versus post 1984:Q4. 1 New Macro Analyzes pre versus post August 27 Post August

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Spring, 2007

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Spring, 2007 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Spring, 2007 Instructions: Read the questions carefully and make sure to show your work. You

More information

Interest rate policies, banking and the macro-economy

Interest rate policies, banking and the macro-economy Interest rate policies, banking and the macro-economy Vincenzo Quadrini University of Southern California and CEPR November 10, 2017 VERY PRELIMINARY AND INCOMPLETE Abstract Low interest rates may stimulate

More information

Intermediary Funding Cost and Short-Term Risk Premia

Intermediary Funding Cost and Short-Term Risk Premia Intermediary Funding Cost and Short-Term Risk Premia Wenhao Li and Jonathan Wallen November 22, 2016 Wenhao Short-Term Risk Premia November 22, 2016 1 / 26 Introduction Question: How is short-term risk

More information

Asset Pricing in Production Economies

Asset Pricing in Production Economies Urban J. Jermann 1998 Presented By: Farhang Farazmand October 16, 2007 Motivation Can we try to explain the asset pricing puzzles and the macroeconomic business cycles, in one framework. Motivation: Equity

More information

Discussion of Ottonello and Winberry Financial Heterogeneity and the Investment Channel of Monetary Policy

Discussion of Ottonello and Winberry Financial Heterogeneity and the Investment Channel of Monetary Policy Discussion of Ottonello and Winberry Financial Heterogeneity and the Investment Channel of Monetary Policy Aubhik Khan Ohio State University 1st IMF Annual Macro-Financial Research Conference 11 April

More information

Lecture 4. Extensions to the Open Economy. and. Emerging Market Crises

Lecture 4. Extensions to the Open Economy. and. Emerging Market Crises Lecture 4 Extensions to the Open Economy and Emerging Market Crises Mark Gertler NYU June 2009 0 Objectives Develop micro-founded open-economy quantitative macro model with real/financial interactions

More information

Fiscal Multipliers in Recessions

Fiscal Multipliers in Recessions Fiscal Multipliers in Recessions Matthew Canzoneri Fabrice Collard Harris Dellas Behzad Diba March 10, 2015 Matthew Canzoneri Fabrice Collard Harris Dellas Fiscal Behzad Multipliers Diba (University in

More information

Sticky Wages and Financial Frictions

Sticky Wages and Financial Frictions Sticky Wages and Financial Frictions Alex Clymo 1 1 University of Essex EEA-ESEM, August 2017 1 / 18 Introduction Recent work highlights that new wages more flexible than old: Pissarides (2009), Haefke,

More information

Uncertainty Shocks In A Model Of Effective Demand

Uncertainty Shocks In A Model Of Effective Demand Uncertainty Shocks In A Model Of Effective Demand Susanto Basu Boston College NBER Brent Bundick Boston College Preliminary Can Higher Uncertainty Reduce Overall Economic Activity? Many think it is an

More information

Frequency of Price Adjustment and Pass-through

Frequency of Price Adjustment and Pass-through Frequency of Price Adjustment and Pass-through Gita Gopinath Harvard and NBER Oleg Itskhoki Harvard CEFIR/NES March 11, 2009 1 / 39 Motivation Micro-level studies document significant heterogeneity in

More information