Research

Abstract:  Maturity walls occur when a majority of a firm’s debt comes due within a short period (1-2 years), increasing rollover risk. Despite this, 47% of non-financial firms have them. This paper understands why firms adopt maturity walls and its implications for the aggregate economy. Using Mergent FISD data, I provide evidence that firms incur substantial fixed costs in bond issuance. I develop a dynamic model where firms decide each period the level and dispersion of their debt payments. The main trade-off is rollover risk from maturity walls in the presence of costly equity injections, versus the lower issuance costs incurred from infrequent rollovers. I estimate the model to match both aggregate and distributional moments of firms’ debt payment schedules. Maturity walls increase credit spreads by 21% (36 bps) and default rates by 25% (30 bps). Lowering issuance costs reduces the adoption of maturity walls, but increases firms credit risk. Moreover, omitting maturity walls could underestimate the transmission of a credit market freeze up to 60%.

Presented at: Midwest Economic Association 2024, 20th Annual Finance Conference Washington University in St. Louis (PhD poster session)

Slides

Slides (1 hour version)

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 (Ramey, 2011b; Ramey and Zubairy, 2018), we find that increases in government spending cause 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 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: 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:  We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. In the deflationary equilibrium, we find that the rate of inflation is higher at the risky steady state---which takes uncertainty into account---than at the deterministic steady state---which abstracts away from uncertainty. The rate of inflation at the risky steady state can be positive if the target rate set by the central bank is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding.

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.