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Macroeconomic Effects of Financial Shocks

  • Jermann, Urban
  • Quadrini, Vincenzo

In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7451.

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Date of creation: Sep 2009
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Handle: RePEc:cpr:ceprdp:7451
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  1. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, 06.
  2. Choe, Hyuk & Masulis, Ronald W. & Nanda, Vikram, 1993. "Common stock offerings across the business cycle : Theory and evidence," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 3-31, June.
  3. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, vol. 70(1), pages 82-114, September.
  4. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2005. "Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects," Cardiff Economics Working Papers E2005/13, Cardiff University, Cardiff Business School, Economics Section.
  5. Ellen R. McGrattan & Edward C. Prescott, 2007. "Unmeasured Investment and the Puzzling U.S. Boom in the 1990s," NBER Working Papers 13499, National Bureau of Economic Research, Inc.
  6. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  7. Michael R. Roberts & Mark T. Leary, 2004. "Do Firms Rebalance Their Capital Structures?," Econometric Society 2004 North American Summer Meetings 52, Econometric Society.
  8. Hansen, Robert S & Torregrosa, Paul, 1992. " Underwriter Compensation and Corporate Monitoring," Journal of Finance, American Finance Association, vol. 47(4), pages 1537-55, September.
  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  10. Malcolm Baker & Jeffrey Wurgler, 1999. "The Equity Share in New Issues and Aggregate Stock Returns," Yale School of Management Working Papers ysm124, Yale School of Management, revised 01 Jan 2009.
  11. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
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