Financial stress and the debt structure

David Gauthier

No 875, Bank of England working papers from Bank of England

Abstract: This paper identifies shocks to credit conditions based on aggregate firms’ debt composition. I develop a model where firms fund production with bonds and loans. Only financial shocks imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. I use this result to inform a sign‑restriction VAR and identify the sources of US business cycles. Financial shocks account for a third of output fluctuations. I construct an index of financial stress to test the identification strategy.

Keywords: Business cycles; financial shocks; firm funding; sign restrictions (search for similar items in EconPapers)
JEL-codes: C11 E32 E44 G21 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2020-06-19
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0875

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