Working Paper: NBER ID: w20730
Authors: Fiorella De Fiore; Harald Uhlig
Abstract: We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firm's ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.
Keywords: Corporate Debt; Financial Crisis; DSGE Model; Bank Finance; Bond Finance
JEL Codes: E22; E32; E44; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased costs of market debt relative to bank loans (G21) | preference for bond financing (G32) |
| increased costs (J32) | reduced production (E23) |
| bank flexibility in adjusting loan terms (G21) | mitigated negative impacts of financial shocks on investment and output (F65) |
| combination of shocks to bank efficiency and firm-specific risks (E44) | changes in corporate debt composition (G32) |
| absence of bond finance (G32) | exacerbated negative effects of shocks (E71) |