Working Paper: CEPR ID: DP5727
Authors: Urban Jermann; Vincenzo Quadrini
Abstract: The volatility of US business cycle has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatile in the financial structure of firms.
Keywords: business cycle; debt-equity finance; financing constraints
JEL Codes: E3; G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial innovations (G29) | Increased flexibility of firms (D21) |
| Increased flexibility of firms (D21) | Reduced volatility in the business cycle (E32) |
| Financial innovations (G29) | Reduced volatility in the business cycle (E32) |
| Firms restructuring financial positions during recessions (G32) | Exacerbated recessionary effects (E65) |
| Corporate debt levels dropping during recessions (G33) | Direct relationship with financial flexibility (G32) |