Empirical evidence documents a tight link between aggregate and firm-level investment and corporate credit spreads. Moreover, it has been shown that credit spreads largely reflect a compensation for bearing macroeconoimc risks. We use a tractable model with recursive preferences and time varying macroeoconomic risk to investigate the link between aggregate risk and corporate policies in a produ...

This paper investigates the e¤ect of …nancial shocks using an estimated general equilibrium model that links the …rm’s ‡ows of …nancing with labor market variables. The results show that …nancial shocks have sizeable e¤ects on …nancial variables, vacancy posting, unemployment and wages. Shocks to the job destruction rate are important in describing ‡uctuations in output and unemployment. The an...

This paper studies how international real interest rate shocks can drive business cycles in an emerging economy. We first present evidence that, in emerging economies, real interest rates and real estate prices are negatively correlated and real interest rates are countercyclical. Motivated by this evidence, we develop a model of a small open economy, where entrepreneurs are borrowing constrain...

This paper examines the relationship between stock returns and inflation. We focus on various econometric techniques to test this relationship, using monthly values of the Athens Stock Exchange Price index and the Greek Consumer Price index over the period 1988-2002. The results from a simple OLS model show evidence of a positive but not significant relationship, while when we consider a system...

We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the United States, the United Kingdom, and Japan since 1979. Asset prices and exchange rates can be employed as information variables for a standard “Taylor-type” rule or as arguments in an augmented interest rate rule. Our empirical evidence, based on measures of th...

We introduce intermediation frictions into a Lucas (1978) asset pricing model in order to study the effects of low capital in the intermediary sector on asset prices. Our model shows that low intermediary capital can increase risk premia, Sharpe ratios, volatility and comovement among intermediated assets. Reductions in intermediary capital also lead to a flight-to-quality in which intermediari...

This paper is a contribution to the literature on the factors behind financial stability, focusing on monetary policy design. In particular, it assesses empirically for a sample of 79 countries in the period 1970 to 2000 whether the choice of the central bank objectives and the monetary policy strategy affect financial stability. We find that focusing the central bank objectives on price stabil...

Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lowercost debt is exactly offset by an induced increase...

We disaggregate consumption growth into components with different levels of persistence and show that a single business-cycle consumption factor can explain satisfactorily the differences in risk premia across book-to-market and size-sorted portfolios. We argue that accounting for persistence heterogeneity in consumption is important for interpreting cross-sectional risk compensations in financ...

This paper studies the effects of shocks to the degree of market completeness. We present a dynamic stochastic economy where agents can trade in complete markets in normal times, but where financial markets can stochastically become incomplete. When this happens, agents cannot trade in state contingent assets and cannot re-hedge their risks. Our model formalizes a new type of purely financial s...