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Do Capital Market Imperfections Exacerbate Output Fluctuations?

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Author Info
Bacchetta, Philippe
Caminal, Ramón

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Abstract

We develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information. In general, a macroeconomic shock has additional effects created by a reallocation of funds between credit-constrained and unconstrained firms. We show that the output response to shocks is not necessarily amplified, however, and can be dampened by the presence of asymmetric information. This depends on the impact of the shock on the composition of external and internal funds for credit-constrained firms. Furthermore, we show that it is important to distinguish between firms’ collateral and firms’ cash flow in determining the dampening or amplifying effect of agency costs.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1422.

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Date of creation: Jun 1996
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Handle: RePEc:cpr:ceprdp:1422

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Related research
Keywords: Agency Costs; Business Cycles; Credit Market Imperfections;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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  1. Raddatz, Claudio, 2003. "Liquidity needs and vulnerability to financial udnerdevelopment," Policy Research Working Paper Series 3161, The World Bank. [Downloadable!]
    Other versions:
  2. Ronel Elul, 2005. "Collateral, credit history, and the financial decelerator," Working Papers 05-23, Federal Reserve Bank of Philadelphia. [Downloadable!]
  3. Pavlos Petroulas, 2007. "Short -Term Capital Flows and Growth in Developed and Emerging Markets," Working Papers 60, Bank of Greece. [Downloadable!]
  4. Beck, Thorsten & Fuchs, Michael & Uy, Marilou, 2009. "Finance in Africa - Achievements and Challenges," Policy Research Working Paper Series 5020, The World Bank. [Downloadable!]
  5. David Aadland, 2002. "Detrending Time-Aggregated Data," Macroeconomics 0301007, EconWPA. [Downloadable!]
    Other versions:
  6. Ramon Caminal & Carmen Matutes, 2002. "Can competition in the credit market be excessive?," UFAE and IAE Working Papers 527.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  7. Claudia M. Buch, 2002. "Business Cycle Volatility and Globalization: A Survey," Kiel Working Papers 1107, Kiel Institute for the World Economy. [Downloadable!]
  8. Franz R. Hahn, 2003. "Financial Development and Macroeconomic Volatility. Evidence from OECD Countries," WIFO Working Papers 198, WIFO. [Downloadable!]
  9. Christopher L. House, 2002. "Adverse Selection and the Accelerator," Macroeconomics 0211015, EconWPA. [Downloadable!]
  10. Santiago Carbó Valverde & Rafael López del Paso, 2005. "Do non-financial firms react to monetary policy actions as banks do?," ThE Papers 05/03, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
  11. Francisco Alcalá & Diego Peñarrubia, 2000. "Economic Booms, Trade Deficits, and Economic Policy," Economics Working Papers 397, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  12. Fabio ALESSANDRINI, 2003. "Introducing Capital Structure in a Production Economy: Implications for Investment, Debt and Dividends," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.03, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  13. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2004. "Financial Development and the Instability of Open Economies," NBER Working Papers 10246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Mallick, Debdulal, 2009. "Financial Development, Shocks, and Growth Volatility," MPRA Paper 17799, University Library of Munich, Germany. [Downloadable!]
  15. Beck, Thorstein & Lundberg, Mattias & Majnoni, Giovanni, 2001. "Financial intermediary development and growth volatility : do intermediaries dampen or magnify shocks?," Policy Research Working Paper Series 2707, The World Bank. [Downloadable!]
    Other versions:
  16. Dellas, Harris & Hess, Martin, 2002. "Financial Development and Stock Returns: A Cross-Country Analysis," CEPR Discussion Papers 3681, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  17. Frederic Boissay, 2001. "Credit rationing, output gap, and business cycles," Working Paper Series 087, European Central Bank. [Downloadable!]
  18. Roland Meeks, 2004. "Is collateralised borrowing an amplification mechanism?," Money Macro and Finance (MMF) Research Group Conference 2003 64, Money Macro and Finance Research Group. [Downloadable!]
  19. Fabio ALESSANDRINI, 2003. "Some Additional Evidence from the Credit Channel on the Response to Monetary Shocks: Looking for Asymmetries," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.04, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  20. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  21. Santiago Carbó Valverde & Rafael López del Paso, 2009. "Bank-lending channel and non-financial firms: evidence for Spain," Spanish Economic Review, Springer, vol. 11(2), pages 125-140, June. [Downloadable!] (restricted)
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