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A Dynamic General Equilibrium Framework of Investment with Financing Constraint

Author

Listed:
  • Danyang Xie

    (International Monetary Fund)

  • Chi-Wa Yuen

    (International Monetary Fund)

Abstract

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 that have been widely regarded as an important determinant of financial crises. We derive a link between the value of a firm and social welfare. Using this link, we show the somewhat surprising possibility that the value of a firm can be greater with the constraint. Our model also sheds light on how the effects of productivity shocks and investors' misperception of productivity shocks may be amplified by the financing constraint. Copyright 2003, International Monetary Fund

Suggested Citation

  • Danyang Xie & Chi-Wa Yuen, 2003. "A Dynamic General Equilibrium Framework of Investment with Financing Constraint," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 1-6.
    • Handle: RePEc:pal:imfstp:v:50:y:2003:i:2:p:6
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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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