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Financial intermediation, investment dynamics and business cycle fluctuations

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  • Andrea Ajello

Abstract

I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 35% of GDP and 60% of investment volatility.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-67.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-67

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Financial intermediation, investment dynamics and business cycle fluctuations
    by Christian Zimmermann in NEP-DGE blog on 2011-08-05 03:09:24
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Cited by:
  1. Engin Kara & Jasmin Sin, 2013. "Liquidity, Quantitative Easing and Optimal Monetary Policy," Bristol Economics Discussion Papers 13/635, Department of Economics, University of Bristol, UK.
  2. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2011. "The great escape? A quantitative evaluation of the Fed’s liquidity facilities," Staff Reports 520, Federal Reserve Bank of New York.
  3. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  4. Mimir, Yasin, 2012. "Financial intermediaries, credit Shocks and business cycles," MPRA Paper 39648, University Library of Munich, Germany.
  5. Soeren Radde & Wei Cui, 2013. "Search-Based Endogenous Illiquidity, Business Cycles and Monetary Policy," 2013 Meeting Papers 1009, Society for Economic Dynamics.
  6. Vivek Prasad, 2014. "Balanced budget stimulus with tax cuts in a liquidity constrained economy," Birkbeck Working Papers in Economics and Finance 1401, Birkbeck, Department of Economics, Mathematics & Statistics.
  7. Shouyong Shi, 2012. "Liquidity, Assets and Business Cycles," Working Papers tecipa-459, University of Toronto, Department of Economics.
  8. Shouyong Shi & Christine Tewfik, 2013. "Financial Frictions, Investment Delay and Asset Market Interventions," Working Papers tecipa-501, University of Toronto, Department of Economics.

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