Abstract: We document that an interest rate cut reshapes the cross-sectional distribution of investment rates—fewer zero and small investment rates and more large ones—and particularly so among young firms. The extensive margin investment decision—whether to invest or not—is essential in explaining these findings. We develop a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics to rationalize the evidence and study the implications for the investment channel. The extensive margin investment decision makes monetary policy less effective whenever few firms are inclined to invest: in downturns, but also in economies with low business dynamism and few young firms.

Abstract: This paper proposes an identification strategy for news about sovereign debt-based asset purchases. It measures sovereign yield changes that are unrelated to movements in risk-free interest rates or risk premiums. Around ECB announcements, these reflect the anticipation of shifts in the effective supply of government debt, caused by central bank purchases. This paper documents that asset purchase news about government bonds have substantial spillovers to corporate bond and stock markets, within and beyond the euro area. Spillovers are unequal across euro-area countries, as stock prices rise most in low-risk countries with very large firms. In contrast, sovereign yields fall homogeneously.

Abstract: Many advanced economies sell sovereign bonds at a yield below the risk-free rate plus default risk premium, benefiting from a strong demand for safe assets. The literature shows that this “convenience yield” premium diminishes with bond supply but has focused on individual economies in isolation. In this paper, we investigate how a country’s convenience yield is affected by changes in another country’s supply of sovereign bonds. We collect debt issuance announcements and exploit high-frequency market reactions as well as heteroskedasticity around these events to quantify spillover effects. We find robust evidence that an increase in German debt reduces convenience yields across the euro area. Spillovers to low-risk countries are nearly one-for-one while those to riskier countries are weaker. Additional evidence from France confirms this pattern. We develop a model with multiple sovereigns and heterogeneous credit risk that rationalizes our findings. Distinct but equally safe bonds are close substitutes to hedge against idiosyncratic income risk in recessions, explaining large spillovers, while risky bonds are poor substitutes. Our findings highlight a new source of fiscal spillovers among sovereign yields of low-risk countries.

Abstract: Crises affect firms unequally. For example, natural disasters disrupt only those firms that are located in specific regions. Financial crises particularly impact those firms that require external financing. This paper studies the aggregate effects of shocks that affect a subset of firms in many industries—referred to as asymmetric supply shocks. Based on a heterogeneous-firm model with oligopolistic competition, calibrated to firm-level data, I show two main results. First, asymmetric supply shocks can account for a quarter of fluctuations in aggregate output. Second, a higher intensity of competition among firms makes aggregate output higher on average, but also more volatile over time. The reason is that intense competition, by curtailing firms’ market power, fosters the reallocation of inputs from less productive to more productive firms in the face of asymmetric supply shocks.