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Macro Finance II

Paper Session

Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Janice C. Eberly, Northwestern University

Financial and Total Wealth Inequality with Declining Interest Rates

Daniel Greenwald
,
Massachusetts Institute of Technology
Matteo Leombroni
,
Stanford University
Hanno Nico Lustig
,
Stanford University
Stijn Van Nieuwerburgh
,
Columbia University

Abstract

Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with lower returns on financial wealth, households with high levels of financial wealth must increase savings to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for household welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard Bewley model produces the observed increase in financial wealth inequality in response to a decline in real interest rates, when high financial-wealth households have a financial portfolio with high duration.

Exorbitant Privilege? The Bond Market Subsidy of Prospective Fallen Angels

Viral Acharya
,
New York University, CEPR, and NBER
Ryan Banerjee
,
Bank for International Settlements
Matteo Crosignani
,
Federal Reserve Bank of New York
Tim Eisert
,
Erasmus University and CEPR
Renee Spigt
,
Erasmus University

Abstract

Risky firms just above the investment-grade cutoff face the prospect of becoming ``fallen angels' upon a downgrade. We show that these firms have benefited from investors subsidizing their bond financing costs since the Global Financial Crisis, especially during periods of monetary easing. We document two important consequences of the investor demand for bonds issued by prospective fallen angels. First, the subsidised firms grow disproportionately large and increase their market share by reducing the markup on their products. Second, the resulting spillover effects force their competitors to reduce employment, investment, markups, and sales growth.

The Rise of Bond Financing in Europe

Olivier Darmouni
,
Columbia University
Melina Papoutsi
,
European Central Bank

Abstract

In the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending. We use micro-level evidence from European firms to dissect this aggregate growth and highlight potential risks behind the expansion, some of which came to light in spring 2020. First, the composition of bond issuers has shifted towards riskier firms: a stream of firms entered the bond market for the first time while being significantly smaller, more levered and less profitable than historical issuers. Second, entering the bond market implies a trade-off between growth and risk: new issuers borrowed to invest and grow, but at the cost of higher leverage and interest rates. Moreover, the majority of firms facing a credit rating downgrade in the 2020 crisis were small private firms that entered the bond market after 2012. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.

Corporate Loan Spreads and Economic Activity

Anthony Saunders
,
New York University
Alessandro Spina
,
Copenhagen Business School
Sascha Steffen
,
Frankfurt School of Finance & Management
Daniel Streitz
,
Copenhagen Business School

Abstract

We study the predictive power of loan versus bond spreads for business cycle fluctuations.Using a novel credit spread measure derived from the secondary loan market, we show that loan market-based credit spreads have additional predictive power for macroeconomic outcomes compared to bond spreads as well as other credit spreads and equity returns, both in the U.S. and Europe. Differences in the composition of firms borrowing in loan or bond markets are important in understanding the differential predictive power of both credit spreads. Industry specific loan spreads predict different industry cycles and can be used to construct alternative weighting schemes which further improve the predictive power of loan spreads. Corporate bond purchases by the Federal Reserve at the beginning of the COVID-19 pandemic decreased corporate bond spreads while keeping loan spreads elevated, questioning the predictive power of the bond spread going forward.
Discussant(s)
Ludwig Straub
,
Harvard University
Tyler Muir
,
University of California-Los Angeles
Victoria Ivashina
,
Harvard University
Egon Zakrajzek
,
Bank for International Settlements
JEL Classifications
  • G1 - Asset Markets and Pricing