Aggregate Shocks and Investment Dynamics: A Granular View

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Jackson Park
Hosted By: International Society for Inventory Research
  • Chair: Felipe Farah Schwartzman, Federal Reserve Bank of Richmond

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity

Aubhik Khan
,
Ohio State University
Julia K. Thomas
,
Ohio State University
Tatsuro Senga
,
Ohio State University

Abstract

We study aggregate fl‡uctuations in an economy where fi…rms have persistent differences in total factor productivities, capital and debt or fi…nancial assets. Investment is funded by retained earnings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger fi…rms, those with more collateral, have higher levels of investment than smaller fi…rms with less collateral. Since large and small fi…rms draw from the same productivity distribution, this implies an insufficient allocation of capital in small fi…rms and thus reduces aggregate total factor productivity, capital and GDP.
We consider business cycles driven by shocks to aggregate total factor productivity and by credit shocks. The latter are …financial shocks that worsen fi…rms ’cash on hand and reduce the fraction of collateral lenders can seize in the event of default. In equilibrium, our nonlinear loan rate schedules drive countercyclical default risk and exit, alongside procyclical entry. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of …firms and a deterioration in the allocation of capital that amplifi…es the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock, and more closely resembles the 2007 U.S. recession in several respects. A rise in default and a substantial fall in entry yield a large decline in the number of …rms. Measured TFP falls for several periods, as do employment, investment and GDP, and the ultimate declines in investment and employment are large relative to that in TFP. Moreover, the recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of …firms.

The Role of Financial Heterogeneity in Monetary Transmission

Thomas Winberry
,
University of Chicago
Pablo Ottonello
,
University of Michigan

Abstract

We study the effect of monetary policy on firm-level investment and its implications for the aggregate transmission mechanism. Empirically, firms with low liquid assets or high debt are substantially less responsive to monetary shocks in terms of their capital investment, inventory investment, and stock returns. We build a heterogeneous firm model with financial frictions consistent with this fact. In the model, firms with low net worth find it costlier to finance investment and are therefore less willing to respond to monetary shocks. The aggregate effect of monetary policy therefore depends on the distribution of net worth; it is weak when balance sheets are week, but becomes stronger as they recover.

Short-Term Shocks and Long-Term Investment

Stephen J. Terry
,
Boston University
Itay Saporta-Eksten
,
Tel Aviv University

Abstract

We show empirically that firms are subject to two distinct types of shocks: persistent long-term shocks and transitory short-term shocks. Short-term shocks comprise a significant quantitative share of overall profitability risk facing firms. Although benchmark theories suggest that forward-looking firms should rationally ignore transitory shocks, we uncover evidence that investment is sensitive to these short-term shocks. Our new estimates of the shock process or risk facing firms, together with the investment sensitivities, offer new discipline for models of firm dynamics, investment, and financial frictions.

Globalization Boom and Bust: A Study of United States Automobile Exports from 1913 to 1940

Mario Crucini
,
Vanderbilt University
Dong Cheng
,
Vanderbilt University
Hyunseung Oh
,
Vanderbilt University
Hakan Yilmazkuday
,
Vanderbilt University

Abstract

We study the variation in U.S. automobile export quantities and prices from 1913 to 1940 using a newly constructed panel spanning approximately 100 foreign destinations. Exports rise by a factor of almost 10 during the roaring 1920’s only to collapse by a similar factor in half the time (1928 to 1932). We attempt at account for the boom as a diffusion of a new product replacing an old one (automobiles for horses and buggys) and the collapse (and subsequent recovery) as arising from business cycle variation of destination markets for U.S. automobiles.
Discussant(s)
Juliana Salomao
,
University of Minnesota
Felipe Schwartzman
,
Federal Reserve Bank of Richmond
Robert Chirinko
,
University of Illinois-Chicago
Zhu Wang
,
Federal Reserve Bank of Richmond
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E3 - Prices, Business Fluctuations, and Cycles