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Real versus financial frictions to capital investment

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Author Info
Nihal Bayraktar () (Pennsylvania State University Harrisburg, Middletown, PA 17057, United States)
Plutarchos Sakellaris () (Athens University of Economics and Business, and IMOP, correspondence Department of Economics, AUEB, Patission 76, 10434 Athens, Greece.)
Philip Vermeulen () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)

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Abstract

We formulate and estimate a structural model of firm investment behavior that specifies the exact channel through which financial frictions bite. The model also allows for the existence of both convex andnon-convex costs to adjusting capital. Essentially, we move beyond simply testing and rejecting a neoclassical model without frictions. Our quantitative estimates show that both real and financial frictions have an important effect on firm investment dynamics.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 566.

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Length: 47 pages
Date of creation: Dec 2005
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Handle: RePEc:ecb:ecbwps:20050566

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Related research
Keywords: Investment adjustment costs financing constraints.

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October. [Downloadable!] (restricted)
  2. Simon Gilchrist & Jae W. Sim, 2007. "Investment during the Korean Financial Crisis: A Structural Econometric Analysis," NBER Working Papers 13315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Nicolas Roys, 2007. "Optimal investment policy with fixed adjustment costs and complete irreversibility," CeMMAP working papers CWP29/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
  4. Simon Gilchrist & Jae W. Sim, 2007. "Investment During The Korean Financial Crisis: A Structural Econometric Approach," Boston University - Department of Economics - Working Papers Series WP2007-001, Boston University - Department of Economics. [Downloadable!]
  5. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank. [Downloadable!]
  6. Bayraktar, Nihal & Wang, Yan, 2006. "Banking sector openness and economic growth," Policy Research Working Paper Series 4019, The World Bank. [Downloadable!]
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