As we emerge from the first wave of shocks induced by the COVID-19 pandemic, we need to start asking pressing questions regarding the future beyond the first round of emergencies. It is an appropriate time to start asking about the long-term adjustments that could be taking place in financial markets and economies and the research questions to match those challenges. This is the main objective of the paper “The Macroeconomics of Corporate Debt” written by Markus Brunnermeier and Arvind Krishnamurthy. One central feature is the high corporate indebtedness going in the crisis; the crisis has only strained firms’ debt services and led to a significant jump in bankruptcies. Leverage will determine the ability of firms to operate successfully in the future and deal with uncertainty. In the same way that the 2008 financial crisis zoomed in on the roles of bank capital structure and bank and nonbank short-term debt, so will this crisis attract attention to credit demand and credit frictions in the corporate sector. Markus and Arvind provide a broad roadmap for future research work that can shed light on corporate finance models. They argue that impactful positive and normative questions on the role of corporate debt, both from a theoretical and empirical perspective, can only be answered when integrating corporate finance into macroeconomic models.
Spotlight by Andrew Ellul
Photos courtesy of Markus Brunnermeier and Arvind Krishnamurthy