A Dynamic General Equilibrium Framework of Investment with Financing Constraint, Issues 2002-2041
International Monetary Fund, 2002 - Business & Economics - 21 pages
In this paper, we provide a dynamic general equilibrium framework with an explicit investment-financing constraint. The constraint is intended as a reduced form to capture the balance sheet effects, which have been widely regarded as an important determinant of financial crises. We derive a link between the value of the firm and the social welfare and we find that the value of the firm can be greater with than without the constraint. Our model also sheds light on how the effects of productivity shocks and bubbles may be amplified by the financing constraint.
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300 Capital Stock aAka-l Ak*a Aka 6k Appendix backward shooting balance sheet effect Bank Capital Channel banking sector bubbles budget constraint business cycle bust in investment c(Jfc Capital Path cf(k Channel of Monetary competitive interest rate compute constraint is binding consumer utility consumer's utility maximization Consumption function Consumption Paths critical value dt Jo subject equilibrium explicit f(kt finance its investment finance the firm's financing constraint firm multiplied Firm value multiplied firm's investment firm's value function Firm's Value Maximization Function with financing Function without financing Gilchrist 1999 household implies Interest Rate Function Interest Rate Paths interest rate rt investment constraint Investment function investment-financing constraint Krugman L'Hopital rule labor-leisure choice microfoundation MIUF Monetary Policy multiplied by gamma multiplier associated Obstfeld obtain order conditions policy function c°(k present value RBC model Real Interest Rate relax the financing representative agent self-fulfilling shoot backward solve I(k U(ko unconstrained Utility Maximization Problem V(fco Value and Consumer