How does heightened uncertainty affect the costs of raising finance through the bond market and through bank loans? Empirically, I find that a rise in uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This new stylized fact can be explained...

Is the Philips Curve Still Applicable in Today’s Financial Environment? The relationship between wage inflation and unemployment, is not only considered by Gali and Gambetti (2018:2) to be a “a key link of the relation between prices and economic activity” but also regarded as the focus of...

This paper studies the role of narratives for macroeconomic fluctuations. Microfounding narratives as directed acyclic graphs, we show how exposure to different narratives can affect expectations in an otherwise-standard macroeconomic framework. We identify such competing narratives in news...

In 1946 the economist Arthur Burns defined a business cycle as a period of expansion occurring about the same time in many economic activities, followed by similar general recessions, contractions and revivals, which merge into the expansion phase of the next cycle. Cycles may take from one year...

In the U.S. individual households have the freedom to borrow funds if they need to do so; other households have the freedom to offer their surplus funds to the financial markets. These simple freedoms hide the fundamental reality that these two types of households are in an unequal financial...

The three main economic philosophies (Classical, Keynesians and Monetarists) did not help in preventing the 2007-2008 U.S. financial crisis. Why not? The Classical economists focus on free markets, free of government interference and free of monopolies. They missed the point that when about $10...

The very fact that utility maximization in real business cycle and New Keynesian models is intertemporal suggests the possibility of a Fisherian intertemporal futures market, which is not state-contingent. Ex-ante speaking, the addition of a futures market does not result in any difference, but...

How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that...

We propose a theory of indebted demand, capturing the idea that large debt burdens by households and governments lower aggregate demand, and thus natural interest rates. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal...

Long-term debt contracts transfer aggregate risk from borrowing firms to lending banks. When aggregate shocks increase the future default probability of firms, banks are not compensated for the default risk of existing contracts. If banks are highly leveraged, this can lead to financial...