Program (by speaker) > Luk Paul

Firms have heterogeneous debt structure. High-credit-quality firms rely almost exclusively on unsecured debt and borrow with lower leverage ratios than low-credit-quality firms. In this paper, we develop a tractable macroeconomic model featuring debt heterogeneity. Unsecured credit rests on the value that borrowers attach to a good credit track record. We argue that borrowers and lenders are more cautious in the unsecured debt market, so high-credit-quality firms have lower leverage ratios. Moreover, our model generates procyclical unsecured debt and acyclical secured debt, consistent with the US data. Our model with heterogeneous debt has a smaller amplification effect than a model featuring secured debt only.