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Financial Capacity, Reliquification, and Production in an Economy with Long-Term Financial Arrangements

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  • Mark Gertler

Abstract

This paper characterizes a multi-period production economy in which borrowers and lenders enter long-term financial contracts. A key feature is that aggregate production and borrowers' capacity to absorb debt -- their "financial capacity" - are jointly determined endogenous variables, in the spirit of Gurley and Shaw (1955) Expectations of future economic conditions govern financial capacity, which in turn influences current capacity utilization. Further, disturbances in the present may persist into the future by influencing borrowers' net asset positions. Finally, borrowers may substitute future for current production by preserving their assets in hard times, behavior akin to reliquification as described in Eckstein and Sinai (1986).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2763.

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Date of creation: Nov 1988
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Publication status: published as "Financial Capacity and Output Fluctuations in an Economy with Multiperiod Financial Relationships." Review of Economic Studies, July 1992,p. 455-492
Handle: RePEc:nbr:nberwo:2763

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  1. Farmer, Roger E A, 1985. "Implicit Contracts with Asymmetric Information and Bankruptcy: The Effect of Interest Rates on Layoffs," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 427-42, July.
  2. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  3. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  4. Grossman, Sanford J & Hart, Oliver D, 1983. "Implicit Contracts under Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(3), pages 123-56, Supplemen.
  5. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(1), pages 1-21, February.
  6. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  7. Leach, John, 1988. "Underemployment with liquidity-constrained multi-period firms," Journal of Economic Theory, Elsevier, Elsevier, vol. 44(1), pages 81-98, February.
  8. Townsend, Robert M., 1988. "Information constrained insurance : The revelation principle extended," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 411-450.
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Cited by:
  1. Mishkin, Frederic S, 1994. "Preventing Financial Crises: An International Perspective," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 62(0), pages 1-40, Suppl..
  2. Mark Gertler & Kenneth Rogoff, 1989. "Developing Country Borrowing and Domestic Wealth," NBER Working Papers 2887, National Bureau of Economic Research, Inc.
  3. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.

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