Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations

In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that these types of financial frictions play an important role in the transmission of monetary policy.

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“…10 Asset-versus-earnings based constraints have been recently studied in general equilibrium by Drechsel (2018).…”

Section: Financial Frictions and Firm Dynamics In Theorymentioning

confidence: 99%

“…collateral values and lagged cash flows, controlling for firm fixed effects and other characteristics, including size, leverage, liquidity and Tobin's Q (see Lian and Ma (2018) and Drechsel (2018)).…”

Section: Asset Value Exposurementioning

confidence: 99%

Monetary Policy, Corporate Finance, and Investment

Cloyne

Ferreira

Froemel

et al. 2023

Journal of the European Economic Association

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“…There are eleven variables in the VAR model. In setting up the variables in the VAR model, We follow Drechsel (2020). The data for the analysis spans from the first quarter of 1986 to the last quarter of 2019.…”

Section: Variables In the System And Identification Strategymentioning

confidence: 99%

“…However, the authors obtain this results only under first-moment shocks. Moreover, according to Drechsel (2020), the New Keynesian model may generate a pro-cyclical markup in response to uncertainty shocks in a number of ways. These include (1) where the supply side effects dominate the demand side effects, (2) the model does not have sufficient rigidities in prices and wages, thereby shutting down the core mechanisms driving countercyclical markups, and (3) it may be a combination of the first two, which is likely the case in this paper.…”

Section: Earnings-based Constraints Vs Asset-based Constraintsmentioning

confidence: 99%

Uncertainty Shocks and Corporate Borrowing Constraints

Kamara

Koirala

2023

IJFS

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In this paper, we study the effects of uncertainty shocks in a quantitative framework where firms in the corporate sector are constrained by credit. Specifically, we formulate borrowing constraints as a nested function that features both earnings and capital as alternative instruments for assessing credit worthiness, in line with recent trends in corporate finance. We find that the quantitative framework that incorporates only one instrument (capital or earnings) in the borrowing constraint falls short in matching the business cycle properties of the US economy in terms of the behavior of output, inflation, and the price markup which are an essential part of the literature on uncertainty shocks. Rather, a hybrid formulation of the borrowing constraint which accounts for both capital and earnings helps us bring the results in the quantitative model closer to the data.

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“…The data spans a 50-year period, from 1970 through 2019. In setting up the variables in the system, we follow [22]. The full set of variables in the system are ordered as follows:…”

Section: Baseline Model Inputsmentioning

confidence: 99%

Environmental and Economic Impacts of the Grand Ethiopian Renaissance Dam in Africa

Kamara

Ahmed

Benavides

2022

Water

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A multidisciplinary study was conducted to investigate the environmental and economic impact of the Grand Ethiopian Renaissance Dam (GERD). Focusing on Egypt, we estimate projected losses in Egypt’s annual water allocation from the Blue Nile under the 3, 7, and 10-year GERD reservoir filling scenarios, which are part of an array of scenarios currently under consideration. We then examine the resultant losses in Egypt’s agricultural land and the corresponding impact on selected macroeconomic variables relative to a baseline (no GERD) scenario. For the 3-year filling period, in particular, we estimate projected losses in Egypt’s annual water allocation to be 51.29 ± 2.62%. This translates into annual losses of agricultural land of 52.75 ± 2.44% relative to the baseline, with a resultant decline in food production of 38.47 ± 2.18 % and an overall decline in agricultural sector output by 17.51 ± 0.99%. This contributes to a rise in the national unemployment rate of 11.24 ± 1.77 percentage points above the baseline. Moreover, we estimate projected annual losses in real Gross Domestic Product (GDP) per capita to be 8.02 ± 0.45% relative to the baseline, which translates into an annual loss in real GDP of $26.30 ± 2.81 billion and a loss in welfare of 12.83 ± 0.73% annually, relative to the baseline.

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Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations

Cited by 9 publications

References 40 publications

Monetary Policy, Corporate Finance, and Investment

Monetary Policy, Corporate Finance, and Investment

Uncertainty Shocks and Corporate Borrowing Constraints

Environmental and Economic Impacts of the Grand Ethiopian Renaissance Dam in Africa

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