Working Papers

Abstract: The literature extensively documents that monetary policy announcements convey information that affects risk premia and investors' risk perceptions, yet little is known about how these shifts influence real activity. Exploiting aggregate news shocks (decomposed into policy rate, growth, and risk components) identified from price changes across asset classes during the FOMC announcement window, I provide plausibly causal evidence that news that increases perceived cash flow risk reduces subsequent corporate investment in tangible capital, with effects amplified among firms with a high debt burden. The results hold after controlling for policy rate surprises, isolating non-policy announcement risk news. Consistent with a flight to quality mechanism in credit markets, announcement risk increasing news raises external finance costs for firms with a high debt burden. These firms curtail net borrowing and build precautionary cash buffers, and their investment cuts are sharper and concentrated when debt maturities are short---i.e., when rollover risk is high. At the aggregate level, the investment response to announcement risk news is state dependent: it is larger when the fraction of firms with high rollover risk is higher. Unconditionally, the effect is statistically insignificant because these firms account for a small share of the tangible capital stock and therefore, on average, contribute little to 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. To explain this pattern, we develop a model in which governments hit by negative popularity shocks strategically relax credit policies when information asymmetries in financial markets are severe, using credit expansion as a politically salient instrument to offset approval declines and secure electoral advantages. When entry barriers are the dominant financial friction, by contrast, loosening credit is ineffective and governments rely instead on conventional fiscal tools. Consistent with the model, cross-country macroprudential data show that, in advanced economies, popularity declines predict systematic easing of macroprudential measures. This relationship is absent in emerging economies, where access frictions limit households’ and firms’ ability to enter credit markets.

Abstract: We develop a housing-market model with incomplete information and extrapolative expectations. After observing a noisy signal about a common fundamental, agents rationally anticipate others’ immediate price reactions and the implied current price while extrapolating these beliefs to future prices. This 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 generates simultaneous increases in mortgage supply and housing demand, consistent with the build-up to 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.