Macro Finance
Paper Session
Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Andrea Eisfeldt, University of California-Los Angeles
Monetary Policy and Financial Stability
Abstract
How should monetary policy respond to deteriorating financial conditions? We develop and estimate a dynamic new Keynesian model with financial intermediaries and sticky long-term corporate leverage to show that active response to movements in credit conditions helps to mitigate losses in aggregate consumption and output associated with macro fluctuations. A (credible) monetary policy rule that includes credit spreads is thus welfare-improving, sometimes even obviating the need for explicit inflation targeting.Long-Term Bond Supply, Term Premium, and the Duration of Corporate Investment
Abstract
Shocks to the supply of long-term bonds affect the duration of corporate investment.Using plausibly exogenous variation in the maturity structure of US government debt,
I find that a higher supply of long-term bonds increases firms’ financing costs at long
horizons leading to a crowding-out of long-duration investment. I show that this
crowding out occurs through a redistribution of capital on the basis of cash-flow
duration, both across firms and within firm across projects. I also show that these
changes in the duration of investment map into changes in the maturity of corporate
debt. These results identify important real effects of policies which affect the net
supply of long-term bonds, such as quantitative easing by central banks.
Asset Pricing with Optimal Under-Diversification
Abstract
We study sources and implications of undiversified portfolios in a production-based asset pricing model. Under-diversification arises because managerial effort requires equity stakes, and because investors gain private benefits from concentrated holdings. For both reasons, households take positions in a single firm with idiosyncratic shocks. The model features tractable aggregation despite these uninsurable shocks and firms that face equity issuance costs and borrowing constraints. Matching data on returns and portfolios, we find that the marginal investor optimally holds 45% of their portfolio in a single firm, incentivizing managerial effort that accounts for 4% of aggregate output. Investors derive control benefits equivalent to 3% points of excess return, rationalizing low observed returns on undiversified holdings in the data. A counterfactual world of full diversification would feature higher risk free rates, lower risk premiums on fully diversified and concentrated assets, less capital accumulation, yet higher consumption and welfare. Time-varying exposure to undiversified firm risk that loads on rare disasters can explain approximately 40% of the level and 20% of the volatility of the equity premium. Households would be willing to pay 4.5% of consumption to diversify all idiosyncratic firm risk, all else equal. Since households do not fully internalize effects of their portfolio concentration on firm choices, a targeted subsidy that decreases diversification improves welfare by increasing managerial effort and reducing financial frictions.Discussant(s)
Daniel Greenwald
,
New York University
Tyler Muir
,
University of California-Los Angeles
Lukas Schmid
,
University of Southern California
Mindy Zhang
,
University of Texas-Austin
JEL Classifications
- G0 - General