İşletme Fakültesi Seminer Serisi / Yasin Kürşat Önder

Date: Wed, Feb 26th, 2020

Time: 13:00-14:30

Location: AB2, Meeting Room 345

Title: Tracing the Sources of Fiscal Multipliers

Abstract: Colombian data during the period 2004-2015, we closely trace firms’ loan history across lenders as lenders change their stock of bond holdings, in order to disentangle the variation in credit supply. For our identification strategy, we focus particularly on primary dealer banks, which are required to take on a certain amount of government debt. Thus, during spending booms, primary dealer banks do not readily adjust their portfolio decisions and are likely to pass on liquidity shortages to firms. Our empirical results indicate that during a period of 10 months a 1 percentage point increase in banks’ bonds-to-assets ratio decreases loans to firms by 0.42%. To shed light on the bank-lending channel, we use a firm-level measure of lenders’ bond holdings and find that a one standard deviation shock decreases investment, profits, and wages by 4.21%, 0.70%, and 2.18%, respectively. These results are corroborated using J.P. Morgan’s unanticipated announcement of the inclusion of several Colombian Treasury bonds in its investable indices. This led to a boom in private loans as primary dealers off-load government debt to international investors. We later confirm our results by comparing the lending behavior of the banks that barely meet the criteria of being a primary dealer bank with those that have barely missed the criteria. Finally, our findings are grounded in an endogenous sovereign default model with financial and real sectors. Our model shows that increased government spending limits the amount of available funds to firms, and raises sovereign risk, and primary dealers then pass on these costs to local firms. Essentially, the heightened cost of credit lowers private investment.