Research

Publications

Q-Monetary Transmission (with Ricardo Lagos), Journal of Political Economy (Vol. 132, No.3, March 2024) [Paper] [NBER WP]

We study the effects of monetary-policy-induced changes in Tobin’s q on corporate investment and capital structure. We develop a theory of the mechanism, provide empirical evidence, evaluate the ability of the quantitative theory to match the evidence, and quantify the relevance for monetary transmission to aggregate investment.

Working Papers

Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy (with Manuel García-Santana, Julian di Giovanni, Enrique Moral-Benito, and Josep Pijoan-Mas) [Draft] (Conditionally Accepted at American Economic Review)
(Previously titled "Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications")

This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms’ borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate revenue-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. The findings highlight how procurement design influences aggregate outcomes through firm-level financial frictions and reallocation dynamics.

Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics [Draft] [JMP version] (Conditionally Accepted at Journal of Political Economy)

I study the role of firms’ balance sheet liquidity in the transmission of monetary policy to investment. I develop a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on firms' cash and borrowing. The model matches key novel moments from U.S. firm-level data on liquid asset holdings, debt issuance activity, and investment responses to identified monetary shocks. Counterfactual analysis shows that the rise in U.S. firms' liquid asset holdings over recent decades has significantly increased the relevance of balance sheet liquidity and the behavior of liquid asset returns in monetary transmission.

Frost and Fire: A Tale of Two Crises (with Vladimir Asriyan and Alberto Martin) [Draft]

Financial crises are characterized by depressed asset prices, tight financial constraints, and misallocation of resources. Standard policy responses—such as asset purchases and low interest rates—are generally intended to alleviate these symptoms. This paper distinguishes between two types of crises that appear similar but differ fundamentally in their underlying mechanisms: fire-sale crises, where productive firms are forced to sell assets; and demand-freeze crises, where productive firms are unable to purchase assets. While both lead to similar observable outcomes, they have contrasting general equilibrium effects and may call for different policy interventions. Notably, conventional policies can be counterproductive in demand-freeze crises, as they may exacerbate financial constraints and further distort resource allocation. Empirical evidence on the pattern of capital reallocation among U.S. firms suggests that demand-freeze crises are, in fact, more common.

Idiosyncratic Labor Risk and Aggregate Risk Sharing with Financial Frictions [Draft]
(Previously titled "Risk Aversion, Labor Risk, and Aggregate Risk Sharing with Financial Frictions") [2018 version]

The exposure of firms and financial institutions to aggregate shocks is a key driver behind financial crises. This paper studies how idiosyncratic uninsurable labor income risk faced by lender households influences the concentration of aggregate risk on borrower entrepreneurs' balance sheets. I propose a tractable model of households' idiosyncratic labor risk and embed it into a workhorse business cycle framework with informational asymmetries in entrepreneurial financing and privately optimal contracting. The presence of idiosyncratic labor income risk affects aggregate fluctuations and risk concentration through two explicit channels: i) endogenous increases in the share of human wealth in households' total wealth increase realized idiosyncratic consumption risk, given labor income risk; and ii) cyclicality in the idiosyncratic labor income risk itself leads to cyclicality in realized consumption risk. In the calibrated model with nominal rigidities, both channels make households less reluctant to bear aggregate risk, resulting in its higher concentration on the balance sheets of entrepreneurs. Quantitatively, the former channel plays a small role, while empirically plausible countercyclicality in idiosyncratic labor income risk can lead to considerable amplification of aggregate volatility, reminiscent of conventional financial accelerator dynamics.

Bank Market Power and Credit Allocation (with Felipe Brugues and Rebecca De Simone) [New draft coming soon]

We study how bank competition affects commercial lending, credit allocation, and firm performance. Using evidence from Ecuador’s commercial credit market and pass-through estimates from the 2014 SOLCA loan tax, we identify lending distortions due to supply- side bank market power and distinguish them from other sources of pricing power in credit markets. We find that 26% of observed loan markups are due to joint profit maximization and that moving to Bertrand-Nash competition would substantially reduce loan prices, increase loan use, and expand credit access. These distortions vary markedly across borrowers and are especially large for small and young firms and for new lending relationships. We combine this empirical evidence with a structural general equilibrium model of firm dynamics and bank competition in the lending market to quantify how limited bank competition distorts credit allocation, firm-level outcomes, and aggregate allocative efficiency.

Monetary Policy Shocks, Financial Structure, and Firm Activity: A Panel Approach [Draft]

This paper assesses the differences in how nonfinancial firms respond to high frequency identified monetary policy shocks conditional on various measures of their financial conditions. In line with the effects of monetary policy shocks on real aggregate activity, the most significant disparities between firms arise slowly, over a horizon of approximately 4 to 12 quarters after a shock. Among the explanatory financial variables considered, both higher leverage and lower liquid asset holdings at the time of a contractionary monetary shock tend to predict relatively lower fixed capital, inventory and sales growth in the cross-section of firms. When simultaneously controlling for both the relevance of leverage and liquid assets, it is the latter that explains the disparities over the longer horizon. Low liquid asset holdings are also shown to be associated with stronger pass-through to borrowing costs.

Works in Progress

Government Procurement and Demand Volatility (with Isaac Baley and Manuel García-Santana)