Macroeconomic Effects Of Financial Shocks

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Executive Summary

In this paper the authors document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. They develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by 'Financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables.

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