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Real versus financial frictions to capital investment

  • Bayraktar, Nihal
  • Sakellaris, Plutarchos
  • Vermeulen, Philip

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 and non-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. JEL Classification: E22

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Paper provided by European Central Bank in its series Working Paper Series with number 0566.

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Date of creation: Dec 2005
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Handle: RePEc:ecb:ecbwps:20050566
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