Abstract:
To attract retail time deposits, over 7,000 FDIC insured U.S. commercial banks publicly post their yield offers. I document a sizeable and pro-cyclical cross-sectional dispersion in these yields during the period 1997 - 2011, revealing the presence of market power for this highly homogeneous financial product. The yields were also adjusted sluggishly and asymmetrically in response to increasing or decreasing fed funds rate target regimes. I investigate to what extent information (search) costs on the part of the investors in this market can explain the observed pricing behavior. I build and estimate an asset pricing model with heterogeneous search cost investors. A large fraction of high information cost uninformed investors and the exit of low information cost informed investors rationalizes the observed price dispersion. I further qualitatively match the asymmetric yield rigidity within the framework of costly consumer search without the need to impose menu costs or other restrictions on the banks' repricing behavior.

Abstract:
To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our ``ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform - especially at longer horizons - standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30 percent of the forecast error variance in economic activity at the two-to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S. economic fluctuations during the 1990--2008 period.

Abstract:
Over the last three decades publicly traded firms have increased their cash-to-asset ratio. I document that this trend has been accompanied by an increase in the correlation between the cash-to-assets ratio and observable characteristics of the firm such as firm's size and future research-and-development expenditures. Smaller firms which are also firms with larger research-and-development expenditures relative to size are increasingly relying on financing from accumulation of cash-reserves. I rationalize the observed regularities in the data as coming from the joint choice of technology and financing. Both the cashflows of the project and the arrival of the investment options are private information leading to a principal-agent problem which is solved in an optimal financial contract. The model builds on a recent literature of dynamic contracts - Albuquerque and Hopenhayn (2004), Clementi and Hopenhayn (2006) and DeMarzo and Fishman (2007). Along with debt and equity, cash is part of the implementation of the optimal contract that allows a firm to carry out its intangible investment options. Unlike explanations based on exogenous increases in idiosyncratic firm risk, firm's idiosyncratic risk is endogenously related to the firm's investment and financing choices. A downward trend in inflation, thus makes the financing path feasible and could explain the trends in the data.

The standard Diamond-Mortensen-Pissarides model of equilibrium unemployment has become the dominant paradigm in labor macro. However, recent criticism by Shimer (2005) has questioned the ability of the model to produce the necessary dynamics in its main components vacancies and unemployment to match the observed in the data. Akin to the standard RBC model, the DMP model lacks the necessary internal propagation mechanism. The current paper re-examines the performance of DMP model adding the productive structure of a putty-clay technology introduced by Johansen (1957) and incorporated in a SDGE model by Gilchrist and Williams (2000). The putty-clay model adds a powerful and realistic propagation mechanism in the DMP model by tying the determination of the evolution of job opportunities and labor productivity to irreversible investment decisions by firms and embodied technological progress. This mechanism is consistent with LMD empirical evidence summarized in Bartlesman and Doms (2000) which describes a large dispersion and a highly persistent ranking of productivities across production units. The notion of equilibrium is the competitive search equilibrium introduced by Moen (1997) which incorporates into the model directed search, distribution of wages driven by the distribution of productivities and variable utilization. The evolution of the distribution of wages drives the reallocation flows of workers from less productive units to more productive facilitating the incorporation of the embodied technological progress.