Monetary Policy during Financial Crises: The Inventory Fire Sales Channel Macro-Finance 

The 2007-2008 U.S. financial crisis features a deep recession with slow recovery despite rapid and aggressive cuts in interest rates. This paper proposes an inventory fire sales channel that helps explain the weak monetary transmission during the financial crisis. To do so, I develop a dynamic general equilibrium model in which firms face demand uncertainty and financial frictions and, therefore, manage inventory to avoid stock-outs and cash flow shortfalls. When external financing costs are high, firms cut prices to liquidate their inventory as a source of internal financing. This attenuates the stimulative effects of interest rate cuts on inventory investments and, thus, aggregate output. I provide empirical evidence that the drop in inventory-to-sales ratio following expansionary monetary policy shocks is more significant during financial market disruptions, corroborating the model predictions. Calibrating the model to the U.S. economy, I find that the output impact of monetary stimulus is 21% lower when external financing costs are 10% higher than normal times. 

Work-in-Progress

presented at the 9th IMF-WB-WTO Trade Conference  ​[ under IMF internal review ]


Using a staggered difference-in-differences method and transaction-level export data, we find that the extensive margin---changes in the number of exporters---drives the aggregate “trade deflection’’ effects of large tariff hikes. We develop a dynamic sunk cost model of exporting with destination choices to rationalize the empirical findings and quantify the aggregate impact of tariff hikes.