Macroeconomic Effects of Financial Shocks
(with Urban Jermann)

---

We document the cyclical properties of U.S. firms' financial flows and show that equity payout is procyclical and debt payout is countercyclical. We then develop a model with debt and equity financing to explore how the dynamics of real and financial variables are affected by `financial shocks'. We find that financial shocks contributed significantly to the observed dynamics of real and financial variables. The recent events in the financial sector show up as a tightening of firms' financing conditions which contributed to the 2008-2009 recession. The downturns in 1990-91 and 2001 were also influenced by changes in credit conditions.