RESEARCH
RESEARCH FIELDS
My main research interests are: business cycle analysis using quantitative macroeconomic models, the interaction of financial markets with the macro economy and heterogeneous agent models. For a RESEARCH OVERVIEW click here
WORKING PAPERS
"Firm Leverage, Household Leverage and the Business Cycle", 2010
This paper develops a macroeconomic model of the interaction between consumer debt and firm debt over the business cycle. I incorporate interest rate spreads generated by firm and household loan default risk into a real business cycle model. I estimate the model on US aggregate data. This allows me to analyse the quantitative importance of possible feedback effects between the debt levels of firms and households, and the relative contributions of financial and supply shocks to economic fluctuations. While firm level credit market frictions significantly amplify the response of investment to shocks, they do not amplify output responses. In general equilibrium, higher external financing spreads for households contribute to lower external financing spreads for firms, contrary to traditional Keynesian predictions. Furthermore, total factor productivity shocks remain an important source of business cycles in my model. They are responsible for 71-74% of the variance of output and 56-69% of the variance of consumption in the model. Financial shocks are important in explaining interest rate spreads and leverage ratios, but they account for less than 11% of the fluctuations in output.
*This is an expanded, estimated version of the paper previously circulated as "Are There Any Spillovers between Household and Firm Financing Frictions? A Dynamic General Equilibrium Analysis"
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"Bank Capital, Housing and Credit Constraints", (with Jing Yang), 2010
This paper integrates household financing frictions with bank financing frictions and housing price fluctuations in a dynamic stochastic general equilibrium model. We use a framework in which both bank and household borrowing are subject to default frictions. The bank cannot fully diversify shocks to its borrowers, leading to a link between household and bank default risks. The cyclical behaviour of the cost of the bank-depositors financing friction is determined by two main factors. On one hand, booms improve the financial health of the banks' borrowers which tends to reduce the cost of bank funding. On the other hand, consumption smoothing by savers and borrowers during booms increases the proportion of external financing in the banks' balance sheet which tends to increase the cost of bank funding. As a result of these opposing effects, the model can match procyclical profits and leverage in the financial sector. However, the business cycle dynamics of output, consumption and investment in the model with bank financing frictions are virtually identical to those of the model with only final borrower credit frictions.
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"Banks as Better Monitors and Firms' Financing Choices in Dynamic General Equilibrium", 2010
This paper builds a dynamic general equilibrium model that emphasizes banks' comparative advantage in monitoring financial distress in order to explain firms' choice between bank loans and market debt. Banks can deal with financial distress more cheaply than bond holders, but this requires a higher initial expenditure proportional to the loan size. In contrast, bond issues may involve a small fixed cost. Entrepreneurs' choice of bank or bond financing depends on their net worth. The steady state of the model can explain why smaller firms tend to use more bank financing and why bank financing is more prevalent in Europe than in the US. A higher fixed cost of issuing market debt is a key factor in replicating the higher use of bank financing relative to market debt in Europe. Finally, we find that for plausible calibrations one can predict aggregate quantities just as well using a model with only one type of loan with costs of financial distress that are an average of the costs for bank loans and market debt.
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DISSERTATION
"Essays on Financing Frictions in Dynamic General Equilibrium Models", 08/2010
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WORK IN PROGRESS
"Rational Bubbles in US Business Cycles"
"Uninsured Income and Production Risk over the Business Cycle"
"Contagion between Firm and Household Credit Spreads through Bank Funding Frictions"