Carlos González-Aguado
Economics Ph.D. candidate
Research areas: Credit Risk, Corporate Finance, Financial Econometrics
Latest version of my JOB MARKET PAPER:
"Interest Rate Shocks and Credit Risk" (with J. Suarez)
We explore the implications of aggregate uncertainty regarding the short-term interest rate in a dynamic model of firm financing with two key frictions: a moral hazard
problem in the relationship between the firm and its outside financiers, and earnings retention as the only source of inside financing. Financial frictions make firms unable to adjust immediately to their target debt ratios after changes in the risk-free interest rate. We embed the financing model in a model of industry dynamics and analyze how changes in the interest rate affect firms in different stages of their lives. The model delivers patterns of leverage and survival rates (by age) consistent with empirical evidence. The predictions regarding the effect of a shift in the interest rate on credit risk show (i) a very different reaction of old and young firms, and (ii) an asymmetric response of all firms to increases and decreases in the short-term rate. These predictions suggest new lines of empirical research.