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Langelinie Allé 47
jpo <at> nationalbanken <dot> dk
Secondary: corporate finance, household finance
2022/10/28 - new draft for Banking Panic Risk and Macroeconomic Uncertainty
European Economic Review, forthcoming
The business cycle dynamics of firms' debt maturity vary across the firm size distribution. Small and medium-sized firms have a more pro-cyclical debt maturity than large firms. This paper explores the determinants of firms' debt maturity, and the importance of firms' debt maturity for their investment and leverage dynamics. To do so, it embeds a maturity choice in a model of firm investment and financing. Firms shorten debt maturity during times when default risk premiums are high and their internal funds are scarce. This behavior is consistent with both the life cycle and business cycle dynamics of firms' debt maturity. Endogenous debt maturity helps firms to deleverage faster in response to negative shocks.
Aggregate risk in the term structure of corporate credit, with Ram Yamarthy
Recent crises have emphasized the tail risks present in corporate credit markets. Using credit default swap (CDS) data across maturities, we document two patterns. First, while the CDS term structure is generally upward sloping, financially constrained firms exhibit a negative slope. Second, shorter-term spreads display greater sensitivity to aggregate risk, a pattern driven by the expected loss component. To understand these findings, we construct a dynamic model of firm behavior where corporations finance investment using short and long-term debt. The model suggests that dis-investment by constrained firms amplifies stress and plays an important role in term structure dynamics.
The macroeconomic effects of shadow banking panics
revise & resubmit, B.E. Journal of Macroeconomics
We study the interaction between occasionally binding financial constraints in the traditional (retail) banking sector and banking panics in the shadow banking sector. 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 of and amplify boom-bust dynamics around 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. The timing of this intervention matters: an intervention before the banking panic would have been more effective and might even have avoided the panic.
Banking panic risk and macroeconomic uncertainty, with Jakob Guldbæk Mikkelsen
revise & resubmit, Journal of Money, Credit & Banking
We explore the interactions between banking panics and uncertainty shocks. To do so, we build a model of a production economy with a banking sector. In the model, financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases macroeconomic uncertainty. Vice versa, a shock to macroeconomic uncertainty increases the likelihood of a banking panic. This banking panic channel amplifies the macroeconomic effects of uncertainty shocks. A counter-cyclical capital buffer increases welfare by reducing the likelihood of a banking panic.
We investigate the effects of the risk of flooding on the prices of single-family homes in Denmark. Houses that are exposed to flood risk today, as well as houses that will be exposed to flood risk in the future due to rising sea levels, are priced at a discount.
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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