Macroeconomic Effects of Financial Shocks

42 Pages Posted: 15 Sep 2009 Last revised: 31 May 2023

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: September 2009

Abstract

In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions.

Suggested Citation

Jermann, Urban J. and Quadrini, Vincenzo, Macroeconomic Effects of Financial Shocks (September 2009). NBER Working Paper No. w15338, Available at SSRN: https://ssrn.com/abstract=1472276

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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