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  5. Macro-Finance in Volatile Times
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Macro-Finance in Volatile Times

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square, Golden Gate 1&2
Hosted By: American Economic Association
  • Chairs:
    Kilian Huber, University of Chicago
  • Ludwig Straub, Harvard University

Sophisticated Borrowing Constraints and Macroeconomic Dynamics

Chen Lian
,
University of California-Berkeley
Yueran Ma
,
University of Chicago
Pablo Ottonello
,
University of Maryland
Diego J. Perez
,
New York University
Al-Mahdi Ebsim
,
New York University

Abstract

Classic macro-finance models feature “hard” borrowing constraints tied to the liquidation value of physical assets, where creditors cut credit indiscriminately to maintain borrowing limits and financial acceleration ensues. We study “sophisticated” borrowing constraints featured in the debt contracts of U.S. nonfinancial firms. They use covenants to specify borrowing limits linked to operating earnings. Moreover, following covenant violations, creditors obtain partial control rights and improve firm performance by reducing agency problems, so earnings increase although borrowing and investment decrease. We construct a quantitative model with these key features. At the micro level, our model matches the patterns of firms’ borrowing and investment in the data, in normal times and after covenant violations. At the macro level, our model produces less financial acceleration, consistent with the resilience of U.S. nonfinancial corporations during recessions.

Exchange Rates, Natural Rates, and the Price of Risk

Moritz Lenel
,
Princeton University
Rohan Kekre
,
University of Chicago

Abstract

We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand and thus interest rate differentials account for 80% of the volatility in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises.

When do Endogenous Portfolios Matter for HANK?

Adrien Auclert
,
Stanford University
Matthew Rognlie
,
Northwestern University
Ludwig Straub
,
Harvard University
Tomas Tapak
,
Stanford University

Abstract

Most of the literature studying heterogeneous-agent New Keynesian models takes household portfolios as exogenously given. What changes when agents are allowed to hedge aggregate risk? We develop a simple sequence-space method to solve for endogenous portfolios, impulse responses, and second-order risk premia in heterogeneous-agent models. Applying our method to a simple HANK model, we show that the effects of monetary shocks and balanced-budget fiscal shocks are unchanged, but that unrestricted portfolio choice can significantly attenuate the response to deficit-financed fiscal shocks. The associated hedging portfolios appear counterfactual. Imposing more realistic short-sale constraints, or adding additional aggregate shocks to the model so that markets are incomplete with respect to these
shocks, usually restores standard outcomes.

Climate Capitalists

Niels Gormsen
,
University of Chicago
Kilian Huber
,
University of Chicago
Sangmin Oh
,
University of Chicago

Abstract

Climate change has raised the question of how to incentivize green investments by firms even when the returns to green investments are low relative to emission-intensive investments. In theory, a cost of capital channel can raise green investments similarly to a carbon tax even if the returns to green investments remain low. This channel requires that firms perceive the cost of green capital as lower than that of brown capital. Using hand-collected data, we show that green and brown firms perceived their cost of capital to be the same before 2016. Once climate concerns by financial investors and governments surged after 2016, green firms perceived their cost of capital to be on average 1 percentage point lower. Moreover, some of the largest energy and utility firms have started applying a lower cost of capital to greener divisions. The findings suggest that the cost of capital channel can incentivize the reallocation of capital toward greener investments across firms and within firms.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit