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Endogenous Financial Constraints: Persistence and Interest Rate Fluctuations

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  • Juan Pablo Medina

Abstract

This article analyzes firm dynamics when the entrepreneurs have limited capacity to comply with their financial contracts. We characterize the optimal constrained contract under this imperfection in the presence of productivity and interest rate fluctuations. We show that under the optimal contract, productivity and interest rate fluctuations have amplified effects on the firms’ dynamics, beyond what would be predicted in the case of perfect enforceability. Moreover, the persistence of these fluctuations is higher when the compliance problems are more severe. These findings can be related to the fact that countries with better contract enforceability display deeper financial development and better economic performance.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 290.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:290

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  1. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2001. "A Decade Lost and Found: Mexico and Chile in the 1980s," Documentos de Trabajo 110, Centro de Economía Aplicada, Universidad de Chile.
  2. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
  3. Rui Albuquerque & Hugo Hopenhayn, 2002. "Optimal Lending Contracts and Firm Dynamics," RCER Working Papers 493, University of Rochester - Center for Economic Research (RCER).
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  7. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
  8. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  9. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 883-913.
  10. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Jaime C. Guajardo, 2007. "Financial Frections and Business Cycles in Middle Income Countries," Working Papers Central Bank of Chile 444, Central Bank of Chile.
  2. Jaime C. Guajardo, 2008. "Financial Frictions and Business Cycles in Middle-Income Countries," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmid (ed.), Current Account and External Financing, edition 1, volume 12, chapter 8, pages 279-344 Central Bank of Chile.

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