Research

Abstract:  Maturity walls occur when a majority of a firm’s debt comes due within a short period (1-2 years), increasing rollover risk. Despite this, 47% of non-financial firms have them. This paper understands why firms adopt maturity walls and its implications for the aggregate economy. Using Mergent FISD data, I provide evidence that firms incur substantial fixed costs in bond issuance. Based on this, I develop a dynamic model where firms decide each period how much debt to issue and the dispersion of their debt payments. The main trade-off is the heightened rollover risk from maturity walls in the presence of costly equity injections, versus the lower issuance costs incurred from infrequent rollovers. I estimate the model to match both aggregate and distributional moments of firms’ debt payment schedules. Consistent with the data, maturity walls increase credit spreads by 21% (36 bps) and default rates by 25% (30 bps). Lowering the issuance cost reduces the adoption adoption of maturity walls, but increases firms credit risk. Moreover, the model underscores the importance of accounting for maturity walls when assessing the transmission of aggregate shocks: omitting maturity walls could underestimate the transmission of a credit market freeze up to 60%.

Abstract: This paper sheds novel light on how government spending shocks affect firm investment. Using the narrative military spending news shock to identify exogenous variation in government spending a la Ramey 2011, we find that increases in government spending cause the capital expenditures of publicly-listed firms to increase by up to one percentage point on average. The investment response of the average firm is not driven by the set of firms plausibly directly affected by the government spending news. Instead, we show empirically that government spending leads to a persistent decline in long-term real interest rates. Firms respond to falling costs of capital by issuing more debt and increasing corporate investment.

Abstract: We analytically and numerically demonstrate that the so-called deflationary equilibrium of the New Keynesian model may feature a positive---albeit below the target rate---inflation at its risky or stochastic steady state. Necessary and sufficient conditions for inflation to be positive in the deflationary steady state are (i) the degree of uncertainty is high and (ii) the inflation target is positive. We argue that our model is consistent with the dynamics of inflation in Japan over the past three decades. Our analysis suggests that a persistently positive inflation rate does not necessarily mean that the economy has escaped the deflationary equilibrium. 

Draft expected early 2025.

Abstract: This paper explores how the distribution of default risk impacts the transmission of monetary policy to aggregate investment. In contractions, the distribution of firm default risk shifts, as firms become more likely to default on their debt obligations. I show both empirically and in a model that this shift in the distribution creates a state dependence in the transmission of monetary policy to aggregate investment: aggregate investment is less responsive to changes in interest rates in contractions. In both the data and my model, firms that are at high risk of default are responsible for driving this state dependent transmission because a decrease in interest rates does not pass through to the interest rates they face on issuing new debt. Thus, high default risk firms can't afford to issue new debt to finance additional investment at favorable enough interest rates. Quantitatively, I estimate that the decreased transmission of monetary policy to aggregate investment is large due to the fact that more firms become risky in contractions. In contractions, aggregate investment is between 1 - 2 percent less responsive to a 25 bps expansionary monetary policy shock. 

Abstract: In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven liquidity trap lowers the optimal inflation target nontrivially. Our analysis provides a reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB.