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Financial stress and the debt structure

Author

Listed:
  • David Gauthier

    (Bank of England)

Abstract

This paper identifies shocks to credit conditions based on aggregate firms’ debt composition. I develop a model where firms fund production with bonds and loans. Only financial shocks imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. I use this result to inform a sign‑restriction VAR and identify the sources of US business cycles. Financial shocks account for a third of output fluctuations. I construct an index of financial stress to test the identification strategy.

Suggested Citation

  • David Gauthier, 2020. "Financial stress and the debt structure," Bank of England working papers 875, Bank of England.
    • Handle: RePEc:boe:boeewp:0875
    as

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    References listed on IDEAS

    as
    1. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575, November.
    2. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    3. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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