Research

Abstract:  This paper investigates the impact of firms’ debt repayment schedules on leverage, default dynamics, and the transmission of aggregate credit shocks. Firms display heterogeneity in their payment schedules, with some favoring infrequent concentrated payments and others opting for frequent dispersed payments, which mitigate rollover risk but entail repeated issuance costs. Using a quantitative model calibrated to existing literature, I find that as firms increase leverage, they shift from concentrated to dispersed debt payment schedules. This shift is driven by the escalating cost of being unable to roll over debt due to poor fundamentals, while the cost of issuing dispersed debt remains stable. I decompose the credit spreads firms face and find that 10% (17 bps) are attributed to firm fundamentals vs their schedule of payments. Additionally I estimate the negative effects that debt issuance costs have on firm value. I find that after eliminating the debt issuance cost, firms are 3% larger, with the largest growth accruing to small firms.

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: 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.