Work in Progress

[Job Market Paper]

This paper studies the role of debt contracts and financial frictions in the transmission of monetary policy to firm-level investment. Empirically, using information from a detailed loan-level dataset matched with balance sheet data for US non-financial firms, I document that in response to a contractionary monetary shock, asset-based borrowers -firms with more pledgeable assets, but low profitability- experience sharper contraction in net debt issuance and investment than cash flow-based borrowers. To explore the possible channels and provide microfoundation for the coexistence of these debt contracts, I setup a heterogeneous firm New Keynesian model with limited enforceability. In the model, firms with low-productivity and more pledgeable assets choose asset-based contracts endogenously and are more responsive to monetary shocks because their borrowing constraint is more sensitive to asset price fluctuations. These results about debt contracts and balance sheet effects contribute to the discussion of how financial frictions shape the transmission mechanism of monetary policy.

This paper studies the determinants of TFPR, a revenue based measure of total factor productivity. Recent business cycle models are built upon the assumption of countercyclical dispersion in TFPR. But, the distribution of TFPR is endogenous, dependent upon exogenous shocks and the endogenous determination of prices. An overlapping generations model with monopolistic competition and state dependent pricing is constructed to study the factors that shape the TFPR distribution. The empirical focus is on three key data patterns: (i) countercyclical dispersion of TFPR , (ii) countercyclical dispersion of price changes and (iii) countercyclical frequency of price adjustment. The analysis uncovers two interesting scenarios in which these moments are matched. One arises in the presence of shocks to the dispersion of TFPQ, a quantity based measure of total factor productivity, along with a negatively correlated change in the mean of TFPQ. The second arises if the monetary authority responds to shocks to the dispersion of TFPQ by ``leaning against the wind". Due to state contingent pricing, the model is nonlinear. Simple correlations mask these nonlinearities of the underlying economy. The real effects of monetary innovations are state dependent, with monetary policy less effective in recessions.

[Current Draft] [SSRN] [NBER]

How does the dispersion of firm-level shocks affect the investment channel of monetary policy? Using firm-level panel data, we construct several measures of dispersion of productivity shocks, time-pooled and time-varying, and interact high-frequency identified monetary policy shocks with these measures of idiosyncratic shock volatility. We document a novel fact: monetary policy has dampened real effects via the investment channel when firm-level TFP shock volatility is high. Our estimates for dampening effects of volatility are statistically and economically significant - moving from the tenth to the ninetieth percentile of the volatility distribution approximately halves point estimates of impulse response functions to contractionary monetary policy shocks. Given that dispersion rises in recessions, these findings offer further evidence as to why monetary policy is weaker in recessions, and emphasize the importance of firm heterogeneity in monetary policy transmission.

[Current Draft] [SSRN]

The Non-Linear Effectiveness of Monetary Policy (with Russell Cooper)

This paper studies the effects of money shocks on output. In this era of unconventional monetary policies, especially quantitative easing programs immensely increase the money supply. This study argues for the existence of a nonlinear relationship, that is, extreme money shocks have no real effects. We argue that intermediate monetary policy shocks do affect the economy, but through the interaction of extensive and intensive margins, and the effects are non linear. In this paper, key is determining when the nonlinear response occurs.

Bank Lending Channel of Quantitative Easing Programmes (with Nejat Gokhan Okatan)

We study the role of bank heterogeneity in the transmission channels of quantative easing programmes. We argue that (depending on their size) having excess liquidity steers banks to lend to riskier firms -contributing to the systemic risk. The aim is to investigate the rich interactions between QE programmes and various macroprudential policy tools.