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Asset Quality Dynamics

Author

Listed:
  • Dean Corbae

    (University of Wisconsin)

  • Erwan Quintin

    (Wisconsin Business School)

Abstract

We provide a simple corporate finance environment with endogenous security design which aggregates to a standard macroeconomic model. The model is quantitatively consistent with the cyclical properties of safe corporate debt issues, in particular with the fact that those issues are less procyclical than other sources of corporate financing. It is also consistent with the countercyclicality of risk spreads on corporate debt. We then use the model to measure the effect of a protracted periods of low safe yields, one of the main features of the so-called "saving glut" the global economy is currently experiencing. A long period of low interest rates on safe debt has little impact on the level of economic activity but causes output and investment volatility to fall.

Suggested Citation

  • Dean Corbae & Erwan Quintin, 2019. "Asset Quality Dynamics," 2019 Meeting Papers 368, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:368
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    Cited by:

    1. Babus, Ana & Hachem, Kinda, 2023. "Markets for financial innovation," Journal of Economic Theory, Elsevier, vol. 208(C).
    2. Amaral, Pedro S., 2023. "The demographic transition and the asset supply channel," European Economic Review, Elsevier, vol. 151(C).
    3. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2020. "Cash‐Flow Tranching And The Macroeconomy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1815-1843, November.
    4. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2016. "A New Perspective on the Finance-Development Nexus," Working Papers (Old Series) 1629, Federal Reserve Bank of Cleveland.
    5. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2017. "Financial Engineering and Economic Development," Working Papers 16-29R, Federal Reserve Bank of Cleveland.

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