News Shocks and the External Finance Premium

Shen Guo

The B.E. Journal of Macroeconomics, 2011, vol. 11, issue 1, 27

Abstract: US data show that the external finance premium, measured by the high yield bond spread, moves countercyclically and leads movements in output by four quarters. This paper constructs a model with nominal rigidities and financial accelerator to explain this observation. The key finding of this paper is: it is agents' reaction on news about future technology changes that generates the observed countercyclical movement and lead-lag pattern of the external finance premium, while a contemporary technology shock generates a procyclical movement of the external finance premium. The variance decomposition based on the estimated model demonstrates that news shocks account for about 72% of fluctuations in the external finance premium.

Keywords: news shocks; external finance premium; financial accelerator; nominal rigidities (search for similar items in EconPapers)
Date: 2011
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DOI: 10.2202/1935-1690.2291

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