Insights from the Intersection of Finance and Macroeconomics
Paper Session
Sunday, Jan. 5, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Arvind Krishnamurthy, Stanford University
Monetary Policy Under Multiple Financing Constraints
Abstract
We revisit the credit channel of monetary policy when firms face multiple financial constraints. We show theoretically that the multiplicity of financial constraints mutes the response of borrowing and investment to expansionary policy but amplifies the response to contractionary policy, relative to a benchmark with a single constraint. After tightening, the constraint that tightened the most tends to bind, while after an easing, the one that eased the least does. We provide strong support for our predictions using US firm microdata and a quasi-natural experiment around an accounting rule change that increases the number of tight financial constraints. We embed our mechanism into a New Keynesian heterogeneous-firm model and find that our mechanism can account for a large part of the well-documented, but previously unexplained, asymmetric response of aggregate investment to monetary policy.Reconciling Macroeconomics and Finance for the US Corporate Sector: 1929 - Present
Abstract
We examine how to reconcile, quantitatively, the high volatility of market valuations of U.S. corporations with the relative stability of macroeconomic quantities over the period 1929-present. We use a stochastic growth model extended to incorporate factorless income as a measurement framework to investigate this apparent tension. Macroeconomic and financial variables are measured in a consistent fashion using the Integrated Macroeconomic Accounts of the United States, which offer a unified data set for the income statement, cash flows, and balance sheet of the U.S. Corporate Sector. We use our model to conduct two valuation exercises. First we measure the rates of return to investment in physical capital implied by observed capital-output ratios and model-implied cash flows to capital. Second, we conduct a \cite{CS1987} style valuation exercise using overall Enterprise Value and Free Cash Flow for the U.S. corporate sector. Based on these two valuation exercises, we argue that fluctuations in expected cash flows to firm owners have been the dominant driver of fluctuations in the market value of U.S. corporation from 1929 to 2023, with modest and transitory fluctuations in expected rates of return playing a smaller role. More important, we find similar time-series for expected returns from these two exercises. In this sense, our model offers a reconciliation of volatile market valuations and stable capital output ratios.The Secular Decline of Bank Balance Sheet Lending
Abstract
The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since the 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70% to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation.Discussant(s)
Michael Bauer
,
Federal Reserve Bank of San Francisco
Thomas Winberry
,
University of Pennsylvania
Hanno Lustig
,
Stanford University
Lu Liu
,
University of Pennsylvania
JEL Classifications
- G1 - General Financial Markets