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Project

The Macroeconomics of corporate Debt: Causes and Consequences of the corporate debt overhang

Following a decade of low interest rates, firm leverage has increased substantially. This structural rise in firm leverage, aggravated by the COVID-19 crisis, threatens financial stability and might lead to another lost decade of low productivity. While household leverage has attracted extensive research after the Great Financial Crisis, firm leverage dynamics remain a blind spot of macroeconomics. Studies on the drivers of firm leverage fail to introduce the role of banks characteristics in their theoretical model such as their greater ability to restructure debt and their level of optimism. This proposal fills this gap by constructing a capital structure model with behavioural banks and debt restructuring. On top of this theoretical contribution, this project brings the model to the data and studies the impact of banks’ sentiment on firm leverage by constructing a sentiment indicator with text mining analysis. Research on the effect of bank sentiment and firm leverage on investment at the country level are often limited to single country analyses. The last working package overcomes this limitation by providing a detailed account of the impact of bank sentiment and firm leverage on private investment in a panel at the country level. The results of this proposal will identify the unintended consequences of the increase in firm leverage and its impact on productivity and financial stability.

Date:1 Nov 2022 →  Today
Keywords:empirical banking, behavioural economics, firm leverage
Disciplines:Consumption, saving, production, investment, labour markets and informal economy, Prices, business fluctuations and cycles, Econometric modelling, Data collection and data estimation methodology, computer programs, Macro-based behavioural economics