Job Market Paper
Capital-Labor Substitution, Negative Interest Rates, and Bank Lending: Theory and Evidence from the Euro Area
[Click here for the most recent version]
Abstract: This paper studies the impact of negative interest rate policies on bank lending, investment, and employment, taking into account the role of capital-labor substitution in production. Using matched firm-bank data from seven euro area countries and employing a difference-in-differences approach, I find that following the introduction of these policies, firms linked to banks with higher deposit ratios receive less credit relative to their counterparts associated with banks with lower deposit ratios. These firms also invest less but tend to hire more employees, especially in industries with high capital-labor substitutability. These findings highlight the role of capital-labor substitution in shaping the effects of negative interest rate policies. To further analyze these findings in a general equilibrium framework and to quantify the aggregate effects of these policies, I use a DSGE model that incorporates bank lending and a CES production function. I find that negative interest rate policies increase lending, investment, employment, and welfare in consumption equivalent units. This model also reveals that higher capital-labor substitutability surprisingly leads to larger declines in output and bank equity following a negative capital productivity shock. Based on this insight, I show that welfare gains from implementing negative interest rate policies increase with capital-labor substitution, and even slight variations in capital-labor substitution elasticity can have significant implications for both the economy and banks.
Capital-Labor Substitution, Negative Interest Rates, and Bank Lending: Theory and Evidence from the Euro Area
[Click here for the most recent version]
Abstract: This paper studies the impact of negative interest rate policies on bank lending, investment, and employment, taking into account the role of capital-labor substitution in production. Using matched firm-bank data from seven euro area countries and employing a difference-in-differences approach, I find that following the introduction of these policies, firms linked to banks with higher deposit ratios receive less credit relative to their counterparts associated with banks with lower deposit ratios. These firms also invest less but tend to hire more employees, especially in industries with high capital-labor substitutability. These findings highlight the role of capital-labor substitution in shaping the effects of negative interest rate policies. To further analyze these findings in a general equilibrium framework and to quantify the aggregate effects of these policies, I use a DSGE model that incorporates bank lending and a CES production function. I find that negative interest rate policies increase lending, investment, employment, and welfare in consumption equivalent units. This model also reveals that higher capital-labor substitutability surprisingly leads to larger declines in output and bank equity following a negative capital productivity shock. Based on this insight, I show that welfare gains from implementing negative interest rate policies increase with capital-labor substitution, and even slight variations in capital-labor substitution elasticity can have significant implications for both the economy and banks.
Work in Progress
Zombie Firms in the Supply Chain: Upstream and Downstream Implications
(with Ryan N. Banerjee and Boris Hofmann)
Abstract: We examine the effects of zombie firms on supply chains through trade credit and input-output linkages. Using firm-level data for four major European countries we first document that trade credit is a key channel through which zombie firms cause congestion effects on their non-zombie peers. We then explore the upstream and downstream effects of zombies on non-zombie firm and performance through input-output linkages and trade credit. We find that zombie firms have positive downstream effects (from supplier to customer) and negative upstream effects (from customer to supplier). The influence of zombie firms on profitability though input-output linkages can explain both downstream and upstream propagation. Our analysis suggests that, in aggregate, input-output linkages amplify the negative effects of zombie firms on supply chains.
The Roaring 1920s: A Prelude to the Great Depression
(with Lee E. Ohanian)
Zombie Firms in the Supply Chain: Upstream and Downstream Implications
(with Ryan N. Banerjee and Boris Hofmann)
Abstract: We examine the effects of zombie firms on supply chains through trade credit and input-output linkages. Using firm-level data for four major European countries we first document that trade credit is a key channel through which zombie firms cause congestion effects on their non-zombie peers. We then explore the upstream and downstream effects of zombies on non-zombie firm and performance through input-output linkages and trade credit. We find that zombie firms have positive downstream effects (from supplier to customer) and negative upstream effects (from customer to supplier). The influence of zombie firms on profitability though input-output linkages can explain both downstream and upstream propagation. Our analysis suggests that, in aggregate, input-output linkages amplify the negative effects of zombie firms on supply chains.
The Roaring 1920s: A Prelude to the Great Depression
(with Lee E. Ohanian)
Publications
Dynamic General Equilibrium Modeling of Long and Short-Run Historical Events
(with Gary D. Hansen and Lee E. Ohanian)
[Click here to access]
Abstract: We provide quantitative analyses of two striking historical episodes, the timing of the Industrial Revolution in England, and the sources of U.S. economic fluctuations between 1889-1929. Applying data from 1245-1845 within the “Malthus to Solow” framework shows that the timing of the Industrial Revolution reflects a subtle interplay between large changes in TFP and deaths from plagues. We find that U.S. economic fluctuations, including the Panics of 1893 and 1907, were driven primarily by volatile TFP, and that growth during the “Roaring Twenties” should have been even stronger, reflecting a large labor wedge that emerged around World War I.
Dynamic General Equilibrium Modeling of Long and Short-Run Historical Events
(with Gary D. Hansen and Lee E. Ohanian)
[Click here to access]
Abstract: We provide quantitative analyses of two striking historical episodes, the timing of the Industrial Revolution in England, and the sources of U.S. economic fluctuations between 1889-1929. Applying data from 1245-1845 within the “Malthus to Solow” framework shows that the timing of the Industrial Revolution reflects a subtle interplay between large changes in TFP and deaths from plagues. We find that U.S. economic fluctuations, including the Panics of 1893 and 1907, were driven primarily by volatile TFP, and that growth during the “Roaring Twenties” should have been even stronger, reflecting a large labor wedge that emerged around World War I.