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Investigating fluctuations in U.S. manufacturing : what are the direct effects of informational frictions?

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  • WenLi Li
  • Pierre-Daniel Sarte

Abstract

In this paper, we explore how informational frictions in credit markets directly affect U.S. manufacturing fluctuations. Within the context of a dynamic industry model, we propose a strategy for identifying intermediation costs related to informational asymmetries between lenders and borrowers. The analysis suggests that these costs have been steadily falling over the post-war period. We also present evidence that changes in the cost of intermediation should directly affect output, as opposed to just propagating the effects of other shocks. Finally, we find that the relative share of output fluctuations explained by financial innovations increases monotonically over time. Therefore, policy changes that reduce financial frictions, and thereby increase output, are likely to be most effective in the long run.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 00-01.

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Date of creation: 2000
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Handle: RePEc:fip:fedrwp:00-01

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Keywords: Business cycles;

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  4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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  15. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  16. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
  17. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  18. Fredric S. Mishkin & Philip E. Strahan, 1999. "What Will Technology Do to Financial Structure?," NBER Working Papers 6892, National Bureau of Economic Research, Inc.
  19. Russell Cooper & Joao Ejarque, 1994. "Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis," NBER Working Papers 4819, National Bureau of Economic Research, Inc.
  20. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
  21. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  22. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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