Research

Maturity walls occur when a majority of a firm's debt comes due within a short period (1-2 years), increasing rollover risk. Despite this, 47% of non-financial firms have them. This paper understands why firms adopt maturity walls and its implications for the aggregate economy. Using Mergent FISD data, I provide evidence that firms incur substantial fixed costs in bond issuance. I develop a dynamic model where firms decide each period the level and dispersion of their debt payments. The main trade-off is rollover risk from maturity walls in the presence of costly equity injections, versus the lower issuance costs incurred from infrequent rollovers. I estimate the model to match both aggregate and distributional moments of firms' debt payment schedules. Maturity walls increase credit spreads by 21% (36 bps) and default rates by 25% (30 bps). Lowering issuance costs reduces the adoption of maturity walls, but increases firms credit risk. Moreover, omitting maturity walls could underestimate the transmission of a credit market freeze up to 60%.

We revisit the effect of government spending on corporate investment. Employing a narrative approach to identify exogenous variation in government expenditures (Ramey, 2011b; Ramey and Zubairy, 2018), we find that a one-percentage-point increase in military spending news, as a share of GDP, raises capital expenditures of publicly listed US firms by more than one percent over five years. The investment response is not driven by contractors with the Department of Defense, financial constraints, unconventional monetary policy, or geopolitical and economic uncertainty. Instead, we show that news about military spending lowers long-term nominal and ex-ante real interest rates on impact, with effects persisting for up to five years after the shock. Lower interest rates critically translate into a decline in the firm-level cost of capital, particularly the cost of debt. Consistent with the decline in the cost of capital, firms expand debt holdings and investment.

This paper explores how the distribution of default risk impacts the transmission of monetary policy to aggregate investment. In contractions, the distribution of firm default risk shifts, as firms become more likely to default on their debt obligations. I show both empirically and in a model that this shift in the distribution creates a state dependence in the transmission of monetary policy to aggregate investment: aggregate investment is less responsive to changes in interest rates in contractions. In both the data and my model, firms that are at high risk of default are responsible for driving this state dependent transmission because a decrease in interest rates does not pass through to the interest rates they face on issuing new debt. Thus, high default risk firms can't afford to issue new debt to finance additional investment at favorable enough interest rates. Quantitatively, I estimate that the decreased transmission of monetary policy to aggregate investment is large due to the fact that more firms become risky in contractions. In contractions, aggregate investment is between 1 - 2 percent less responsive to a 25 bps expansionary monetary policy shock.

We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. We find that, in the deflationary equilibrium, the rate of inflation is higher at the risky steady state—which takes uncertainty into account—than at the deterministic steady state—which abstracts from uncertainty. The rate of inflation at the risky steady state can be positive if the central bank's inflation target is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding.

In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven liquidity trap lowers the optimal inflation target nontrivially. Our analysis provides a novel reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB.

Detected misreporting triggers stock-price declines, reputational damage, and monetary sanctions, yet misreporting persists. We develop and estimate a dynamic heterogeneous-firm model in which managers inflate reported profits to lower the cost of external finance, at the risk of detection and the loss of access to manipulation. Estimated on U.S. firm-level data, each one-percentage-point increase in reported profitability lowers the per-unit cost of external finance by 1.8%; the directly punitive components of detection are quantitatively small. Almost the entire cost of being flagged operates through two channels: the firm cannot use misreporting to soften its financing wedge, and the wedge is priced off true rather than inflated profits. Prohibiting misreporting reduces shareholder value by 3.1%, of which two-thirds reflect the option value of the channel.