Working Papers

Abstract: The literature documents that monetary-policy announcements affect risk premia and risk perception, yet little is known about how these effects shape real activity. Using daily aggregate risk-news shocks identified from equity returns and Treasury-yield changes, we provide causal evidence that a positive risk-news shock stemming from FOMC announcement days—one that raises risk perception, causing investors see greater risk and uncertainty about future cash flows—curtails subsequent corporate investment in tangible capital. In contrast to studies showing that financial constraints dampen investment responses to interest-rate shocks, we find that constraints magnify responses to positive risk news from FOMC days, and the effect propagates to financial variables. Consistent with a flight-to-quality mechanism that raises external financing costs for constrained firms, positive risk-news causes these firms to (1) reduce investment more sharply; (2) decelerate net borrowing; (3) accumulate larger cash buffers; and (4) experience the greatest investment reductions when their debt is short term—i.e., when rollover risk is highest. At the aggregate level, the investment response to risk-news shocks is state-dependent and strengthens with the share of high-rollover-risk firms; nevertheless, the unconditional average effect remains muted because such firms hold relatively small tangible-capital stocks and thus contribute little to overall aggregate investment.

Abstract: Local currency borrowers are significantly affected by exchange rate fluctuations due to the bank lending channel. Using microdata on borrowers from Hungary, this study examines the spillover effects of foreign currency loans on local currency borrowers following an unexpected appreciation of the Swiss franc (CHF) in January 2015. Our analysis shows that banks with a higher share of unhedged CHF corporate loans (loans to firms without CHF income) reduced their lending in local currency corporate loans following the shock. This relationship is robust across both extensive and intensive margins. Further investigation into the mechanisms reveals that banks with more unhedged CHF corporate loans experience an increase in non-performing CHF loans post-shock, reducing their capital adequacy. Furthermore, the evidence in our paper suggests that reductions in banks' local currency lending due to exchange rate shocks adversely affect the investment activity of small firms and increase their likelihood of default.

Abstract: Using a stylized model of lumpy investment, we derive a novel measure of the expected distortion in firms' capital stock caused by fixed adjustment costs. We apply this measure to U.S. public firms, and find that a strategy that longs firms in industries with high fixed adjustment costs and shorts those in industries with low fixed adjustment costs yields an equal-weighted (value-weighted) CAPM alpha of 6.78% (5.50%) per annum. To account for this return spread, we develop a quantitative model that incorporates aggregate productivity shocks, aggregate adjustment friction shocks, and heterogeneous firm-level adjustment friction. Our model demonstrates that firms with high adjustment frictions exhibit both higher returns and lower market betas relative to their low-friction counterparts, consistent with the data.

Abstract: We empirically establish a political-credit nexus, revealing that a decline in political popularity can lead to an increase in the private credit-to-GDP ratio among advanced economies. We introduce a theoretical model to explain these findings, positing that governments might manipulate credit policies in response to significant information asymmetries within financial markets, aiming to offset the adverse effects of popularity and secure political benefits. In contrast, in economies where entry barriers represent the primary financial friction, governments tend to rely on traditional fiscal policies. We validate our model's predictions by analyzing macroprudential policy data, discovering that in advanced economies, a decrease in popularity is significantly associated with a relaxation of macroprudential policies. This relationship, however, is not observed in emerging economies, where individuals encounter greater barriers to access and difficulty entering the credit market.

Abstract: We develop a model of incomplete information and extrapolative expectations in housing markets. Agents rationally anticipate immediate house price reactions after observing a noisy signal about a fundamental but extrapolate this belief to future house prices. This house price extrapolation leads to mutually reinforced incentives to participate in the housing market among both buyers and lenders as well as between the two groups. The model can generate simultaneous increases in both the supply of mortgages as well as the demand for housing as observed during the build-up phase of the Global Financial Crisis. We discuss a variety of potential policies that curb the housing market from entering a boom phase, such as changes in the policy rate, transaction taxes, government guarantees, and price caps.