Private Sectoral Balances, Financial Markets and Business Cycles in the US Economy

Join us on February 25 for a presentation of research with Scholar Giuliano Toshiro Yajima. The presentation will be streamed live on Zoom.

ABSTRACT

This paper studies the dynamic interaction between private-sector financial balances, financial conditions, and the business cycle in the United States, with a focus on the distinct roles played by households and non-financial corporations. Motivated by balance-sheet and Minskyan perspectives on macro-financial instability, we analyze how demand and financial shocks propagate through the economy and how their effects depend on cyclical conditions, financial stress, and balance-sheet positions.

We adopt a two-step empirical strategy. First, we identify economically interpretable structural shocks using a structural VAR that jointly models output, asset prices, credit spreads, interest rates, and private-sector net lending positions. Second, we trace the dynamic effects of these shocks using local projections, which allow us to relax the dynamic restrictions of VAR models and to explore nonlinear and heterogeneous propagation mechanisms. In addition to baseline linear impulse responses, we examine state dependence across business-cycle phases, financial conditions measured by credit spreads, and private-sector balance-sheet regimes, as well as distributional responses using quantile local projections.

Our results show that private-sector financial balances respond strongly to financial shocks, but in systematically different ways across sectors and states of the economy. Corporate balances are particularly sensitive to credit conditions and act as leading indicators of cyclical dynamics, while household balances react more strongly to income, wealth, and interest-rate movements. Shock propagation is markedly asymmetric: financial disturbances are amplified during periods of tight credit conditions and when the private sector enters shocks in a net deficit position. Distributional evidence further indicates that shocks disproportionately affect the tails of the balance-sheet distribution, especially for non-financial corporations.

Overall, the findings highlight the central role of private-sector balance sheets in shaping macro-financial dynamics and underscore the importance of distinguishing between household and corporate balances when assessing cyclical risks and financial vulnerability.