Corporate Effects of Monetary Policy: Evidence from Central Bank Liquidity Lines with Luis Alvarez and Thiago Silva

Monetary policy tools increasingly involve operations with corporate assets. This paper examines how these tools directly impact real activity by influencing demand for firms’ debt instruments and firms’ liquidity management policies. Using quasi-experimental variation from the inclusion of eligible corporate debt instruments in the Central Bank of Brazil’s collateral framework, combined with a novel dynamic regression discontinuity design methodology, we find that eligibility increased firms’ debt issuance, modestly decreased spreads, and reduced firms’ holdings of safe assets, indicating a decrease in precautionary savings and leading to significant increases in firms’ employment and supply chain liquidity. To interpret this mechanism, we discuss how inelastic (segmented) financial markets make this policy induce a permanent borrowing subsidy, functioning like a liquidity injection that can relax firms’ borrowing constraints. This easing of expected future borrowing constraints reduces firms’ liquidity risk, amplifying the policy passthrough as firms have more incentives to reduce cash hoarding and expand production. We develop a semi-structural approach based on our reduced-form RDD estimates to measure firms’ response, finding that each 0.8% induced borrowing subsidy leads to 1% increase in debt issuance, 0.2% reduction in cash holdings and a 0.4% increase in the wage bill.

Firm-Level and Aggregate Effects of Cheaper Liquidity: Evidence from Factoring with Thiago Silva and Henry Zhang

We show that firms experience large increases in sales and purchases after receiving cheaper liquidity. We focus on factoring, defined as the supplier-initiated sale of receivables. In Brazil, receivables funds (FIDCs) securitize receivables for institutional investors. By assembling a novel transaction-level dataset of factoring with other credit operations for all registered firms and FIDCs, we construct a shift-share instrument for factoring financing supply based on FIDC flows. We then use a novel combination of electronic payments, trade credit, and employer-employee matched data to estimate the impacts. A flow-induced increase in receivables demand reduces firms’ factoring interest rate. In response, firms demand more permanent labor and less temporary labor. In our model, these effects arise from factoring’s purpose of reducing cash inflow volatility, helping firms match inflows to outflows, which firms otherwise achieve at an efficiency cost through substitution across labor types. Using our model, we estimate that an aggregate decrease in the economy-wide factoring spread by 1 percentage point leads to 0.3 to 0.5 percentage point increases in aggregate output and wages.

Quantile Mixture Models: Estimation and Inference with Luis Alvarez 

Nonparametric density mixture models are popular in Statistics and Econometrics but suffer from computational and inferential hurdles. This paper introduces nonparametric quantile mixture models as a convenient counterpart, discusses several applications, and proposes a computationally efficient sieve estimator based on a generalized method of L-moments. We develop a full inferential theory for our proposed estimator. In doing so, we make several contributions to statistical theory that allow us to extend a numerical bootstrap method to high-dimensional settings. We show that, as a direct byproduct of our theory, we can provide an inference method for the distributional synthetic controls of Gunsilius (2023), a novel approach to counterfactual analysis for which formal inference methods were not yet available. As an empirical application of the latter, we apply our proposed approach to inference in assessing the effects of a large-scale environmental disaster, the Brumadinho barrage rupture, on the local wage distribution. Our results uncover a range of effects across percentiles, which we argue are consistent displacement effects, whereby median-earning jobs are replaced by low-paying contracts.

Volatility and Under-Insurance in Economies with Limited Pledgeability: Evidence from the Frost Shock with Thiago Silva and Henry Zhang

We use transaction-level data on payments, credit, and insurance to examine how Brazilian farmers responded to the severe frost of July 2021, a shock that affected coffee, a perennial crop whose plants are a major component of farm value. The frost shock reduced both output and the pledgeable value of farmers’ collateral. We find that insured farmers increased investment in the years following the shock, while uninsured farmers reduced investment and borrowing. We show how this pattern is consistent with models of imperfect pledgeability of a firm’s collateral, where constrained firms neither insure (ex-ante) nor fully recover from a shock (ex-post). Limited commitment endogenously generates under-insurance through the combination of upfront payment of the insurance premium with the tightening of borrowing constraints post-shock due to the decrease in total collateral. We discuss two equilibrium implications of this mechanism: the inefficacy of emergency credit lines in targeting liquidity constrained firms and the amplification of output volatility from the rising risk of extreme weather shocks.

The Macrofinancial Link Between Tariffs, Exchange Rates, and Trade with Sarah Gertler

Market Design, Forward Guidance, and Investment Decisions in Carbon Credit Markets with Luis Alvarez, Thiago Silva, and Henry Zhang

Brazil’s Central Bank Digital Currency: Improving Financial Infrastructure with Programmability with Robert Townsend

LIFT papers 2023. Volume 5, Issue 5