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jpo <at> nationalbanken <dot> dk
Secondary: corporate finance, household finance
Corporate debt maturity and investment over the business cycle
(revise & resubmit, European Economic Review)
The business cycle dynamics of firms' investment and debt maturity vary across the firm size and age distribution: Young and small firms have strongly pro-cyclical debt maturity and investment, old and large firms a-cyclical debt maturity and weakly pro-cyclical investment. This paper explores the importance of firms' debt maturity choices for their investment dynamics. First, it documents cross-sectional heterogeneity of the cyclicality of firms' debt maturity in the data. Then, it embeds a maturity choice in a model of firm investment and financing. Firms shorten their debt maturity when they become financially constrained. This selection explains both the life cycle and business cycle dynamics of firms' debt maturity. Endogenous debt maturity reduces the impact of financial frictions on investment volatility substantially.
The macroeconomic effects of shadow banking panics
We study the effects of shadow banking panics in a macroeconomic model with a rich financial system, including deposit-financed retail banks and wholesale-financed shadow banks. Shadow banking panics occur when retail banks choose not to roll over their lending to shadow banks. Occasionally binding financial constraints of retail banks increase the likelihood and amplify the severity of such shadow banking panics. The model can quantitatively match the dynamics of key macroeconomic and financial variables around the US financial crisis. We quantify the impact of wholesale funding market interventions akin to those implemented by the Federal Reserve in 2008, finding that they reduced the fall in output by about half a percentage point. Unconditionally, central bank interventions reduce output volatility and the likelihood of banking panics .
Banking panic risk and macroeconomic uncertainty, with Jakob Guldbæk Mikkelsen
(revise & resubmit, Journal of Money, Credit & Banking)
We show that systemic risk in the banking sector breeds macroeconomic uncertainty. We develop a model of a production economy with a banking sector where financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility, increases risk premia on asset prices and yields a new benefit from countercyclical bank capital buffers.
Mortgage defaults, bank runs and regulation in a housing economy, with Marcus Mølbak Ingholt
We develop a macroeconomic model capturing the linkages between house price fluctuations, mortgage defaults, and bank runs. In the model, endogenous house price drops can lead to bank runs if losses on mortgage lending push the liquidation value of the banking sector below the value of the sector's outstanding deposits. Once a series of output shocks is simulated for the model to match output, the model predicts the historical movements in key real and financial variables in the U.S. Moreover, bank runs are ruled out during the mid-2000s boom and attain a high probability during the Savings and Loan Crisis and the Great Recession. We use the model to evaluate different macroprudential policies. Stricter loan-to-value standards and bank capital requirements reduce the frequency of bank panics, but at the cost of impeding financial intermediation over the business cycle. A dynamic capital requirement is contrarily able to both curb systemic risk and support intermediation, as this tightening only binds in times of financial distress.
This memo reviews the academic literature on the effectiveness of nonpharmaceutical interventions in mitigating the spread of COVID-19. The review only includes empirical papers. The literature suggests that interventions are generally effective in mitigating COVID-19 spread. Mask mandates and bans of mass gatherings are associated with reductions in infections. School closures can also be effective. The evidence on workplace closures and business restrictions is more mixed. The effectiveness of interventions depends on their timing and the characteristics of the country or region in which the intervention is used.
This economic memo isolates two channels through which the "corona shock" affects the economy: a fall in asset prices and an increase in the dispersion of future shocks to the economy. Both shocks are contractionary, but they operate through different channels. A CCyB that is reactivated early reduces the impact of an asset price shock the most. In contrast, a CCyB that is reactivated late reduces the impact of a volatility shock the most. Overall, the corona-shock warrants an early build-up of the CCyB.
Work in Progress
The consumption effects of household financial distress, with Florian Exler
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