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"Firm Heterogeneity and Macro," Dec 11/12 in Bonn.

Keynotes by Ellen McGrattan (University of Minnesota) and Vasco Carvalho (University of Cambridge)

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⚠️Call for papers for the 4th Macro & firm heterogeneity conference in December in Bonn. Keynotes by Ellen McGrattan & Vasco Carvalho. Submit your paper by July 15th. More info here: tinyurl.com/5n8nyy2u #EconTwitter

We use the model to study unconventional monetary policy (UMP). UMP lowers long-term rates when the short-term rate is at the ZLB. This has the effect that firms borrow at longer durations. The increase in debt overhang makes UMP less effective than conventional monetary policy.

Two channels explain our result: 1) Rollover-risk implies that if a lot of debt matures at the time when interest rates have gone up, this increases firms' cost of capital, lowering investment.

The model replicates the empirical observation that after a contractionary monetary policy shock, firms with shorter remaining debt maturity react more strongly, meaning that they reduce investment by more and that they see larger increases in credit spreads.

We construct a general equilibrium model with heterogeneous firms, long-term debt, and costly default. Firms raise capital, consisting of equity, long-term debt, and short-term debt. Safer firms endogenously have higher leverage, lower credit spreads, and more long-maturity debt.

We combine balance sheet & bond-level data to construct a measure of the share of a firm's debt which matures at any given point in time. Using panel local projections, we show that investment & credit spreads react more strongly to MP when firms have higher maturing bond shares.