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  5. Macro Finance II
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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? Quantitative Easing and 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

We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels -- risky fi rms just above the IG rating cutoff -- enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The bene ting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these fi rms suffered more severe downgrades at the onset of the pandemic.

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 use secondary corporate loan-market prices to construct a novel loan-market-based credit spread. This measure has considerable predictive power for economic activity across macroeconomic outcomes in both the U.S. and Europe and captures unique information not contained in public market credit spreads. Loan-market borrowers are compositionally different and particularly sensitive to supply-side frictions as well as financial frictions that emanate from their own balance sheets. This evidence highlights the joint role of financial intermediary and borrower balance-sheet frictions in understanding macroeconomic developments and enriches our understanding of which type of financial frictions matter for the economy.

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