Research

Abstract:  Maturity walls are events where a majority of debt comes due within a short period of time. While maturity walls can be a potent source of rollover risk for firms, they are common among large non-financial firms. I build a quantitative model to understand the effects of maturity walls on firms’ capital structure decision, cost of borrowing, and default decision. When choosing to have maturity walls, firms face a trade-off between rollover risk and fixed debt issuance costs: maturity walls expose firms to rollover risk but they face lower issuance costs from infrequent rollovers. I estimate the model to match both aggregate and distributional moments of firms’ debt payment schedules. Consistent with the data, firms that choose to have maturity walls also choose lower levels of leverage to effectively manage rollover risk. I find that maturity walls increase credit spreads by 21% (36 bps) and default rates by 25% (30 bps). Additionally, I show that maturity walls amplify the transmission of an aggregate credit market freeze to aggregate defaults. The model also underscores the importance of accounting for maturity walls when assessing the transmission of aggregate shocks: omitting maturity walls would underestimate the transmission of a credit market freeze by 14%-60%.

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: We analytically and numerically demonstrate that the so-called deflationary equilibrium of the New Keynesian model may feature a positive---albeit below the target rate---inflation at its risky or stochastic steady state. Necessary and sufficient conditions for inflation to be positive in the deflationary steady state are (i) the degree of uncertainty is high and (ii) the inflation target is positive. We argue that our model is consistent with the dynamics of inflation in Japan over the past three decades. Our analysis suggests that a persistently positive inflation rate does not necessarily mean that the economy has escaped the deflationary equilibrium. 

Draft expected early 2025.

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.