Financial stress and the debt structure

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 19 June 2020

Staff Working Paper No. 875

By David Gauthier

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.

PDFFinancial stress and the debt structure

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