Research
Publications
Firm Inflation Uncertainty (with Lena Anayi, Nick Bloom, Phil Bunn, Paul Mizen, Greg Thwaites, Ivan Yotzov)
AEA: Papers & Proceedings, May 2023.
Conditionally Accepted at AEJ: Macro
Working Papers
JOB MARKET PAPER
This paper examines the link between access to external finance and the long-term impact of monetary policy on productivity growth. By leveraging loan-level data merged with firm-level balance sheet information, we show that firms' R&D expenditures decline after a monetary tightening, with heterogeneous responses. Firms that lack access to external finance for funding R&D activities experience sharper cuts in R&D spending compared to those with better access. Within an endogenous growth model with nominal rigidities and financial frictions, we interpret this pattern as access to external finance enables firms to sustain innovation during periods of monetary tightening. Our model findings suggest that these short-term impact of monetary policy on R&D investment can have long-lasting effects on productivity, as current R&D efforts drive future productivity growth. Additionally, we show that when firms are provided with the financial flexibility to borrow to finance innovation activities, and monetary policy targets the output gap, it is possible to stabilise output without inducing hysteresis effects.
Firms’ Sales Expectations and Marginal Propensity to Invest (with Andrea Alati, Johannes Fischer, and Maren Froemel)
NEW PAPER! MAY 2024
How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm-level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. We find attentive firms to be more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks.
NOVEMBER 2024
This paper studies the effect of asset-based versus cash flow-based debt contracts on the transmission of monetary policy to firm-level investment and borrowing. Using information from detailed loan-level data matched with balance sheet data and stock return data, I document that in response to a contractionary monetary shock, asset-based borrowers experience sharper contractions in borrowing and investment than cash flow-based borrowers. Despite the fact that asset-based borrowers contribute only 15% to aggregate investment, they are responsible for 64% of the total investment response. To understand the channels and provide a microfoundation for the endogenous choice of these debt contracts, I set up a heterogeneous firm New Keynesian model with limited enforceability. The quantitative model shows that the traditional collateral channel explains this heterogeneous sensitivity as cash flow-based borrowers are less susceptible to collateral damage from changes in asset prices. This result indicates that the prevalence of asset-based debt contracts increases the strength of the financial accelerator channel and thereby shapes monetary policy transmission.
MARCH 2022
How does the dispersion of firm-level shocks affect the investment channel of monetary policy? Using firm-level panel data, we construct several measures of dispersion of productivity shocks, time-pooled and time-varying, and interact high-frequency identified monetary policy shocks with these measures of idiosyncratic shock volatility. We document a novel fact: monetary policy has dampened real effects via the investment channel when firm-level TFP shock volatility is high. Our estimates for dampening effects of volatility are statistically and economically significant - moving from the tenth to the ninetieth percentile of the volatility distribution approximately halves point estimates of impulse response functions to contractionary monetary policy shocks. Given that dispersion rises in recessions, these findings offer further evidence as to why monetary policy is weaker in recessions, and emphasize the importance of firm heterogeneity in monetary policy transmission.
Predicting Financial Constraints: Evidence from the Decision Maker Panel (with Nick Bloom, Phil Bunn, Paul Mizen, Greg Thwaites, Ivan Yotzov)
A DRAFT WILL BE AVAILABLE SOON
This paper introduces a novel survey-based approach to predict the likelihood of UK firms being financially constrained. By leveraging unique firm-level survey data with balance sheet information, we develop an empirical model that incorporates key proxies from the literature, including size, leverage, age, liquidity, and dividend-paying status. Our results show that the developed index aligns closely with these established indicators, while highlighting the prominent roles of liquidity and leverage. Importantly, we identify heterogeneity across firm sizes: liquidity emerges as a more significant determinant of financial constraints for smaller firms, while leverage is more critical for larger firms. This suggests that smaller firms may face credit rationing, reducing the relevance of leverage, whereas larger firms, with better access to external finance, are more affected by leverage. The index is validated by its ability to identify firms that experience sharper declines in investment following contractionary monetary policy shocks, thereby capturing a financial accelerator effect.
Work in Progress
Market Concentration and Monetary Policy Transmission in a Monetary Union (with Livia Chitu and Federica Romei)
NonLinearities in the Effects of Monetary Policy (with Russell Cooper)
High Frequency Firm Responsiveness (with Nick Bloom, Phil Bunn, Paul Mizen, Greg Thwaites, Ivan Yotzov)