Abstract: I study how financial frictions impact the transmission of monetary policy to investment, considering the specific channel through which the policy is transmitted. Monetary policy affects firms' capital investment through two distinct channels: the pure monetary channel, which operates through changes in interest rates, and the information channel, which operates through changes in investors' beliefs and sentiment about the economic outlook. I show that the role of financial frictions for monetary policy transmission hinges crucially on specific channel. Using Compustat data, I find that firms with high leverage are more sensitive to pure monetary shocks but are less sensitive to Fed information shocks. To shed light on the mechanism, I delve into the the nature of how Fed information affects investors beliefs. I document that the transmission channel of Fed information is primarily non-fundamental, and empirically consistent with changes in investors sentiment in financial markets. Finally, I develop a dynamic general equilibrium model with firm idiosyncratic productivity, real and financial frictions to rationalize the empirical results and quantify the aggregate effects of monetary policy on investment.
Presented at: Boston College & Boston University Green Line Macro Meeting, Fall 2021
Strategic Investors and Exchange Rate Dynamics (with Marco Errico) (Submitted)
Abstract: Foreign exchange rate markets exhibit a significant level of concentration. We develop a monetary model of exchange rate determination that incorporates heterogeneous investors with different degrees of price impact. We show that the presence of price impact amplifies the exchange rate’s response to non-fundamental shocks while dampening its response to fundamental shocks. As a result, investors’ price impact contributes to the disconnect of exchange rates from fundamentals and the excess volatility of exchange rates. We provide empirical evidence in line with our theoretical predictions, using data on trading volume concentration from the US foreign exchange rate market for 18 currencies spanning from 2005 to 2019. Additionally, we extend our framework to account for information heterogeneity among investors, which presents a competing dimension of heterogeneity with qualitatively similar implications for exchange rate dynamics. We show that 80% of the disconnect and 66% of the excess volatility due to investors’ heterogeneity can be attributed to heterogeneity in price impact.
Presented at: Boston College & Boston University Green Line Macro Meeting, Spring 2020
Quarterly Earnings Mania, Markups and the Implications for Business Cycles (with Alessandro Lavia and Marco Errico) (Draft upon request)
Abstract: Managers face continuous pressure to meet short-term forecasts and targets, which can potentially distort their behavior . This paper examines the impact of short-termism on the economy’s response to business cycle fluctuations. Using data on U.S. public companies together with IBES analysts’ forecasts, we find that firms that just meet their profit forecasts have an average markup growth of 0.8% higher than firms that just miss their targets, indicating opportunistic markup manipulation. To assess the aggregate economic implications of these results, we develop a two-period model that incorporates short-term frictions and endogenous markups resulting from customer accumulation. In the model, manager’s private incentives (empire building motifs) are offset by short-term pressures, resulting in higher markups for firms and lower sensitivity of markups to aggregate shocks.
Presented at: Boston College & Boston University Green Line Macro Meeting, Spring 2023
Work in Progress
Firms' Balance Sheet Heterogeneity and Aggregate Fluctuations (with Simone Pesce and Marco Errico)
Unconventional Monetary Policy and Financial Frictions (with Fulvio Ferretti) (Draft upon request)