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Cross-Sectional Financial Conditions, Business Cycles and The Lending Channel

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Abstract
I document business cycle properties of the full cross-sectional distributions of U.S. stock returns and credit spreads from financial and nonfinancial firms. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for lending conditions. SRF also affects firm-level investment beyond firms' balance sheets, and adverse SRF shocks lead to macroeconomic downturns with tighter lending conditions in vector autoregressions (VARs). These results are consistent with a lending channel in which cross-sectional financial firms' balance sheets play a prominent role in business cycles. I rationalize this argument with a model that matches the VAR evidence.

Suggested Citation

  • Thiago Revil T. Ferreira, 2022. "Cross-Sectional Financial Conditions, Business Cycles and The Lending Channel," International Finance Discussion Papers 1335, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1335
    DOI: 10.17016/IFDP.2022.1335
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    More about this item

    Keywords

    Cross-Sectional; Skewness; Business Cycles; Lending Channel;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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