University of Bonn
Institute for Macroeconomics and Econometrics
Adenauerallee 24-42 (mailing address)
Kaiserplatz 7-9, 4th floor (address for visitors)
53113 Bonn, Germany
joachim.jungherr@uni-bonn.de
We provide novel empirical evidence that firms' investment is more responsive to
monetary policy when a higher fraction of their debt matures. In a heterogeneous
firm New Keynesian model with financial frictions and endogenous debt maturity, two
channels explain this finding: (1.) Firms with more maturing debt have larger roll-over
needs and are therefore more exposed to fluctuations in the real interest rate (roll-over
risk). (2.) These firms also have higher default risk and therefore react more strongly
to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger
effects on debt maturity but smaller effects on output and inflation than conventional
monetary policy.
Business credit lags GDP growth by about one year. This contributes to high
leverage during recessions and slow deleveraging. We show that a model in which
firms use risky long-term debt replicates this slow adjustment of firm debt. In the
model, slow-moving debt has important effects for real activity. High levels of firm
debt issued during expansions are only gradually reduced during recessions. This
generates an adverse feedback loop between high default rates and low investment
and thereby amplifies the downturn. Sluggish deleveraging slows down the recovery.
The equilibrium is constrained inefficient because firms exert an externality on the
holders of previously issued debt. The constrained efficient allocation substantially
reduces macroeconomic volatility.
We introduce long-term debt and a maturity choice into a dynamic model of
production, firm financing, and costly default. Long-term debt saves roll-over costs
but increases future leverage and default rates because of a commitment problem.
The model generates rich distributions of maturity choices, leverage ratios, and
credit spreads across firms. It explains why larger and older firms borrow at longer
maturities, have higher leverage, and pay lower credit spreads. Firms' maturity
choice matters for policy: A financial reform which increases investment and output
in a standard model of short-term debt can have the opposite effect in a model
with short-term debt and long-term debt.
This paper studies a model of endogenous bank opacity. Why do banks choose to hide their risk
exposure from the public? And should policy makers force banks to be more transparent? In the model,
bank opacity is costly because it encourages banks to take on too much risk. But opacity also reduces
the incidence of bank runs (for a given level of risk taking). Banks choose to be inefficiently opaque
if the composition of their asset holdings is proprietary information. In this case, policy makers can
improve upon the market outcome by imposing public disclosure requirements (such as Pillar Three of
Basel II). However, full transparency maximizes neither efficiency nor stability. The model can explain
why empirically a higher degree of bank competition leads to increased transparency.
