Financial Frictions

Alvaro Garcia-Marin · Santiago Justel · Tim Schmidt-Eisenlohr

This paper provides a theory and evidence for why firms with higher markups extend more trade credit, focusing on a financing cost channel that is distinct from existing competition-based …

Suman Basu · Emine Boz · Gita Gopinath · Francisco Roch · Filiz Unsal

Prepared as background for the IMF's Integrated Policy Framework, this paper builds a three-period small open economy in which monetary policy, capital inflow controls, sterilized foreign exchange …

Markus K. Brunnermeier · Yuliy Sannikov

This paper solves the full, global equilibrium dynamics (not just a linearization around the steady state) of an economy in which financially constrained "experts" intermediate capital, showing that …

Jason G. Cummins · Kevin A. Hassett · R. Glenn Hubbard

Cummins, Hassett, and Hubbard argue that standard tests of neoclassical investment models (tax-adjusted q and the user cost of capital) have performed poorly mainly because of severe measurement error …

David Rivero · Hugo Rodríguez Mendizábal

This paper demonstrates that the canonical efficiency result of Diamond and Dybvig (1983) — that banks using maturity transformation can decentralize the first-best risk-sharing allocation — breaks …

Alfred Wong · Jiayue Zhang

Cross-currency basis swap spreads are widely read as a post-crisis anomaly in which covered interest parity has broken down; this paper argues the opposite -- that a swap dealer who priced a …

Gorkem Bostanci · Guillermo Ordoñez

The paper studies how the two roles of stock markets — revealing information about firms' fundamentals, which guides capital allocation, and providing liquidity — interact, arguing that when stocks …

Pablo Ottonello

Physical capital, like labour, can be "unemployed" — sitting idle while its owner searches for a buyer or tenant — and this paper documents that in the United States such idle capital is large, …

Hanfeng Chen · Maria Elena Filippin

The paper analyzes the implications of introducing a retail central bank digital currency (CBDC) that competes with commercial bank deposits for household liquidity, in a model where banks must post …

Ben S. Bernanke · Mark Gertler · Simon Gilchrist

Embedding a costly-state-verification debt contract -- in which a borrower's external finance premium depends inversely on net worth -- into an otherwise standard New Keynesian model, this chapter …

Wenxin Du · Jesse Schreger

A Handbook chapter reviewing the breakdown of covered interest rate parity during the Global Financial Crisis and its persistence through the following decade -- how the cross-currency basis is …

Barbara Annicchiarico · Marco Carli · Francesca Diluiso

This paper embeds a carbon pricing sector into an extended DSGE model with a financial accelerator (E-DSGE) featuring heterogeneous firms, bank monitoring, and a borrowing-constraint amplification …

Joseph E. Stiglitz · Andrew Weiss

Stiglitz and Weiss build an equilibrium model of a competitive loan market in which banks cannot directly observe a borrower's project risk, and show that this imperfect information alone is enough to …

Simon Gilchrist · Egon Zakrajšek

This 2012 American Economic Review paper by Simon Gilchrist and Egon Zakrajšek constructs a new corporate-bond credit spread index -- the "GZ spread" -- from a large panel of secondary-market bond …

Markus K. Brunnermeier

Brunnermeier explains how a few hundred billion dollars of mortgage-market losses amplified into the 2007-08 financial crisis, which wiped out roughly $8 trillion in U.S. stock market wealth.

Wenxin Du · Alexander Tepper · Adrien Verdelhan

Covered interest rate parity, the no-arbitrage cornerstone of currency forward pricing, is shown to be systematically and persistently violated among G10 currencies after the 2008 crisis, in ways that …

Stephen G. Cecchetti

This 1995 Federal Reserve Bank of St. Louis Review paper by Stephen Cecchetti surveys the empirical literature attempting to distinguish two competing theories of how monetary policy affects the real …

Alessandra Peter

Most quantitative models of entrepreneurship assume that large firms are widely held and unconstrained; this paper documents that across the Eurozone they are frequently not, and asks what that …

Kenneth A. Froot · Jeremy C. Stein

This 1991 Quarterly Journal of Economics paper by Kenneth Froot and Jeremy Stein explains the empirical correlation between dollar depreciation and foreign direct investment (FDI) inflows into the …

Ben S. Bernanke · Mark Gertler

Bernanke and Gertler build a general-equilibrium model in which entrepreneurs must borrow to fund investment projects, know more than their lenders about the project's chance of success, and can be …

Pablo Ottonello · Thomas Winberry

Combining high-frequency-identified monetary shocks with Compustat data, the paper shows that low-default-risk firms -- those with lower leverage and higher distance to default -- are substantially …

Yu-Ting Chiang · Piotr Zoch

This paper develops a sufficient statistics approach to measuring the aggregate demand effects of financial intermediation disturbances — shocks to the ability of financial intermediaries to supply …

Priit Jeenas

Contrary to treating corporate cash as simply negative debt, this paper shows that firms' liquid-asset holdings, not their leverage, robustly predict which firms cut investment most after a monetary …

Wenhao Li · Ye Li

Crises have cleansing effects—low-quality firms face greater financial shortfalls and invest less than high-quality firms—but public credit support dampens these effects by reducing financing cost …

Philippe Bacchetta · Kenza Benhima · Brendan Berthold

Most recent work on optimal foreign-exchange intervention prices the opportunity cost of reserves off either deviations from uncovered interest parity or deviations from covered interest parity, and …

Aimé Bierdel · Andres Drenik · Juan Herreño · Pablo Ottonello

The paper develops a quantitative capital-accumulation model in which capital trades in illiquid markets with asymmetric information — sellers know the quality of their capital but buyers do not. It …

Ben S. Bernanke · Mark Gertler

This 1995 Journal of Economic Perspectives paper by Ben Bernanke and Mark Gertler surveys the "credit channel" of monetary policy transmission — described explicitly as an amplifying mechanism, not an …

Andrew Atkeson

This 1991 Econometrica paper by Andrew Atkeson examines optimal international lending when a sovereign borrower can both repudiate its debt and privately choose whether to invest or consume borrowed …

Julian di Giovanni · Şebnem Kalemli-Özcan · Mehmet Fatih Ulu · Yusuf Soner Baskaya

Using the universe of Turkish corporate credit transactions matched to bank balance sheets over 2003-13, this paper shows that an easing of global financial conditions lowers domestic borrowing costs …

Natalie Bau · Adrien Matray

India liberalised foreign equity investment industry by industry in 2001 and 2006, and that staggered timing identifies what the policy did to the *distribution* of capital rather than only its level. …

Mark Gertler · Peter Karadi

This 2015 American Economic Journal: Macroeconomics paper by Mark Gertler and Peter Karadi uses a "proxy SVAR" — a structural VAR identified with external instruments rather than timing restrictions — …

Mark Gertler · Simon Gilchrist

This 1994 Quarterly Journal of Economics paper by Mark Gertler and Simon Gilchrist asks whether small manufacturing firms bear a disproportionate share of the manufacturing decline that follows …

Fiorella De Fiore · Marie Hoerova · Ciaran Rogers · Harald Uhlig

The paper studies the euro area interbank money markets during the global financial crisis (2007–09) and sovereign debt crisis (2010–15), documenting four empirical regularities and building a …

Thomas Winberry · Adrien Auclert · Matthew Rognlie · Ludwig Straub

Winberry, Auclert, Rognlie, and Straub extend the Heterogeneous-Agent New Keynesian framework from households to firms, building a canonical heterogeneous-firm model with financial frictions in which …

Ben S. Bernanke

Complementing Friedman and Schwartz's monetary account of the Great Depression, Bernanke argues that the banking panics and pervasive debtor insolvency of 1930-33 independently raised the real cost of …

Mark Gertler · Kenneth Rogoff

This 1990 Journal of Monetary Economics paper by Mark Gertler and Kenneth Rogoff builds a model of North-South lending in which information asymmetries between individual borrowers and world capital …

Paolo Gelain · Marco Lorusso

This paper estimates the effect of oil price fluctuations on US banking variables using a Bayesian SVAR with sign restrictions following Baumeister and Hamilton (2019). Oil market shocks that lead to …

Chenyu Shan · Dragon Yongjun Tang · Wenya Wang

Third-party loan guarantees—in which a fee-charging guarantor formally guarantees a bank loan and conducts its own due diligence on the borrower—are present in approximately 10% of Chinese bank loans …

Kenan Huremović · Gabriel Jiménez · Enrique Moral-Benito · José-Luis Peydró · Fernando Vega-Redondo

This paper provides the first integrated empirical analysis of how bank credit supply shocks propagate through both the production network and the financial network simultaneously, using the universe …

Pedro Bordalo · Nicola Gennaioli · Andrei Shleifer · Stephen J. Terry

This paper incorporates diagnostic expectations — beliefs that overweight the representativeness of recent data, formalized as $E_t^\theta(A_{t+1}) = E_t(A_{t+1}) + \theta[E_t(A_{t+1}) - …

Yan Bai · Jing Zhang

A frictionless multi-country model implies no cross-country correlation between long-run savings and investment rates, so the Feldstein-Horioka finding really is a puzzle for it. Neither limited …

Francesco Saverio Gaudio

This paper documents a puzzle for canonical limited-participation models: when U.S. stock market participation rose from 31.6% to 53% between 1989 and 2007—a period also characterized by the Great …

Enrique G. Mendoza

A standard small-open-economy business-cycle model, augmented with a collateral constraint that caps total debt -- including within-period working-capital loans -- at a fraction of the market value of …

Marvin J. Barth III · Valerie A. Ramey

This 2001 NBER Macroeconomics Annual paper by Marvin Barth and Valerie Ramey tests whether monetary policy operates through a supply-side "cost channel" -- in which a monetary contraction raises …

Stefan Avdjiev · Wenxin Du · Cathérine Koch · Hyun Song Shin

The strength of the US dollar, the size of covered interest parity deviations and the growth of dollar-denominated cross-border bank lending move together in what the authors call a triangular …

Andrei Shleifer · Robert W. Vishny

Shleifer and Vishny argue that textbook arbitrage -- "simultaneous purchase and sale of the same...security in two different markets," requiring no capital and entailing no risk -- does not describe …

Michael C. Jensen · William H. Meckling

Jensen and Meckling develop a theory of why a firm's ownership structure -- the mix of inside equity held by the managing owner, outside equity, and debt -- is not irrelevant, by defining "agency …

Ding Dong · Zheng Liu · Pengfei Wang

Firm-level evidence shows that recessions are characterized not just by aggregate downturns but by a sharp rise in turbulence—a reshuffling of firms' productivity rankings in which high-productivity …