Essays in Macro-Finance

My dissertation consists of three essays in macro-finance. I am the sole author of the first and second chapters. The third chapter is co-authored with Jose Azar.;In the first chapter, I propose an empirical framework to analyze the incidence of corporate defaults over the business cycle. In my setup, firm value is driven by macroeconomic factors and default can occur prior to debt maturity as the firm's value-to-debt ratio falls below a certain threshold, whose value is common to all firms. I interpret the threshold crossing condition as the failure of ex post renegotiation upon a contractual covenant violation, and the difference between the actual value-to-debt ratio and the default threshold as the ex post tightness of covenant. Calibration shows that, even after controlling for the rise in firm leverage beginning in the year 2000, the ex post tightness of covenant for speculative grade issuers significantly rose after the 2001 recession. To test for the plausibility of the threshold spike, I derive point-in-time distributions of the default threshold by matching the forecasts of a benchmark Bayesian vector-autoregression model of the macroeconomic variables and the aggregate default rate. In most quarters of 2001--2002, I find that the calibrated threshold value is below the 95-th quantile of the correspond threshold distribution. Using my threshold distributions, I also calculate Value at Risk measures over that period well above those implied by a constant threshold calibrated to long-run data. I interpret my results as suggestive evidence that: 1. there is strong countercyclicality in the ex post tightness of covenants for speculative grade issuers, beyond the effect of time varying leverage; 2. this countercyclicality is a significant driver of credit risk over the business cycle.;In the second chapter, I present a two-period model in which the real sector responds to the impact of capital rules by means of cash buffer formation. A representative bank lends to firms whose production functions exhibit decreasing returns to scale. Due to capital requirements on the bank, firms are uncertain about the future cost of external financing. Because their productive assets are partly illiquid, firms hoard positive amounts of cash out of the loans to ensure sufficient internal funds for their second-round investment. Intuitively, by ensuring a certain amount of internal funds in all contingencies, firms' cash buffers can substitute for external credit that may occasionally experience sizable drops. However, because a risk-adjusted capital rule increases borrowing costs in high risk states and lowers them in low risk states, relative to a at capital rule, I show that cash buffers can actually be procyclical, thereby reinforcing the procyclical effect of risk-adjusted capital requirements. I also find that whether the firms' cash holding behavior can attenuate or amplify the effect of risk-adjusted capital rules will depend critically on the extent of decreasing returns to scale in firm production and the degree of asset liquidity.;In the third chapter, we document a strong negative correlation between the aggregate corporate cash-to-assets ratio and the short-term nominal interest rate between 1951 and 2010. We perform a vector-autoregression analysis, and show that while the cash ratio strongly responds to interest rate shocks, the short-term rate does not respond significantly to the cash ratio. Our results suggest that most of the variations in aggregate corporate cash holdings, especially at lower frequencies, can be understood as movements along a relatively stable money demand relationship. In particular, the increase in the cash ratio between 1982 and 2010 can largely be explained by the large decrease in nominal interest rates over that period. We thus propose a simple explanation to the corporate cash holding puzzle: as a proportion of their total assets, US corporations have been holding more and more cash-like assets since the 1980s as they have seen the opportunity cost of doing so decrease over time.