Working Papers

TFPR: Dispersion and Cyclicality (with Russell CooperNEW VERSION: MARCH 2024 

R&R at AEJ: Macro

This paper studies the determinants of the dispersion and cyclicality of TFPR, a revenue based measure of total factor productivity.  Recent business cycle models are built upon the assumption of countercyclical dispersion in TFPQ, a quantity based measure of total factor productivity, based on evidence of countercyclical dispersion in TFPR. But, these are very different measures of productivity. 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 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 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".  The findings are robust to the introduction of non-CES household preferences. Due to state contingent pricing, the model is nonlinear. Simple correlations mask these nonlinearities of the underlying economy. 

   [Current Draft]   [SSRN]   [NBER]

Firms’ Sales Expectations and Marginal Propensity to Invest (with Andrea Alati, Johannes Fischer, and Maren Froemel)  


How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm-level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. We find attentive firms to be more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks.

November 2023 

This paper studies the effect of asset-based versus cash flow-based debt contracts on the transmission of monetary policy to firm-level investment and borrowing. Using information from detailed loan-level data matched with balance sheet data and stock return data, I document that in response to a contractionary monetary shock, asset-based borrowers experience sharper contractions in borrowing and investment than cash flow-based borrowers. Despite the fact that asset-based borrowers contribute only 15% to aggregate investment, they are responsible for 64% of the total investment response. To understand the channels and provide a microfoundation for the endogenous choice of these debt contracts, I set up a heterogeneous firm New Keynesian model with limited enforceability. The quantitative model shows that the traditional collateral channel explains this heterogeneous sensitivity as cash flow-based borrowers are less susceptible to collateral damage from changes in asset prices. This result indicates that the prevalence of asset-based debt contracts increases the strength of the financial accelerator channel and thereby shapes monetary policy transmission.

Financial Frictions, Intangible Investment, and Monetary Policy (with Aydan Dogan)


This paper examines the role of cash flow-based borrowing in financing intangible investments. Typically, R&D expenditures negatively correlate with EBITDA since they are expensed by firms. However, we find that this negative link is significantly weaker for firms with cash flow-based debt contracts. Additionally, we explore how cash flow-based borrowing affects the transmission of monetary policy shocks to intangible investments. Our findings indicate that firms using cash flow-based borrowing are less sensitive to contractionary monetary policy shocks, demonstrating the benefit of this additional funding tool in mitigating adverse effects. This type of borrowing not only promotes increased intangible investment but also reduces its sensitivity to monetary policy changes. These insights shed light on the potential supply-side effects of monetary policy, particularly the heterogeneity in productivity response. The method of financing intangible investment, especially through the interplay between R&D expenditures and financial frictions, has significant implications for productivity and monetary policy.

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]

Predicting Financial Constraints: Evidence from the Decision Maker Panel (with Nick Bloom, Phil Bunn, Paul Mizen, Greg Thwaites, Ivan Yotzov)


This paper introduces a novel survey-based approach to predict the likelihood of UK firms’ being financially constrained. By leveraging unique firm-level survey data merged with balance sheet information, we develop an empirical model incorporating firm-level key proxies from the literature, such as size, age, debt-to-assets ratio, productivity, and cash-to-assets ratio. We show that our index aligns well with these established proxies, while highlighting the importance of firm size and leverage. The validity of our index is demonstrated by its ability to identify firms that experience sharper declines in investment following a contractionary monetary policy shock, suggesting the presence of a financial accelerator factor.

Work in Progress

Market Concentration and Monetary Policy Transmission in a Monetary Union (with Livia Chitu and Federica Romei)

NonLinearities in the Effects of Monetary Policy (with Russell Cooper)

High Frequency Firm Responsiveness (with Nick Bloom, Phil Bunn, Paul Mizen, Greg Thwaites, Ivan Yotzov)