TIMOTHY MORELAND

Abstract: This paper finds that the financing behavior of US firms along the business cycle changed following the late 1990s. While debt issuance remained procyclical for firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we provide evidence that consolidation in the US financial sector contributed to this change. We then verify this mechanism by building a general equilibrium business cycle model and simulating financial consolidation: decreasing firms’ bargaining power vis-à-vis lenders and diluting lenders’ ties to customary borrowers. The change in corporate financing behavior induced by financial consolidation significantly increased the sensitivity of firms’ investment and employment to aggregate shocks.

Abstract: We study how leverage determines firm-level responses to monetary policy. Using both high-frequency financial market and quarterly investment data, we find that the role of leverage in monetary transmission changed around the financial crisis of 2007-09. Firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. The higher responsiveness is driven by firms whose leverage is more dependent on long-term debt, suggesting an outsize role for monetary policy affecting long-term funding conditions since the crisis. We also find suggestive evidence for transmission through changes in monetary policy uncertainty.

Abstract: An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis.