Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification

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What effect do financial intermediaries have on the macroeconomy? This question, which has been central to macroeconomics since at least the Great Depression, has received significant attention recently. The main challenge for researchers is that macroeconomic conditions that originate outside the financial system affect the balance sheets of intermediaries. This makes it difficult to isolate the intermediaries’ effects on the economy.

In this paper, we propose an empirical strategy to study the causal effects of financial intermediaries on the macroeconomy. We identify financial shocks as the high-frequency changes in the market value of individual intermediaries in a narrow window around their earnings announcements, based on intraday stock prices. Earnings announcements are infrequent (typically quarterly). As a result, the amount of financial news released around these events tends to be higher than usual. By focusing on the narrow windows around these events, we further isolate financial shocks from other nonfinancial macroeconomic shocks.

Using these financial shocks, we show that drops in the net worth of US intermediaries have substantial effects on the net worth of nonfinancial firms. A 1% drop in the market value of US intermediaries leads to a 0.2%–0.4% drop in the market value of nonfinancial firms. These effects are more pronounced:

  • for firms with high default risk and low liquidity
  • when the total net worth of the financial system is low

Our results provide direct evidence of the effects of financial intermediaries on the rest of the economy, which suggests policies could play a role in ensuring the well-being of the financial sector.

DOI: https://doi.org/10.34989/swp-2022-24