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Debt, collateral, and U.S. manufacturing investment: 1954-1980

  • William P. Osterberg
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    I perform an empirical analysis of Euler equations for the firm's choices of capital, labor, hours, and debt. Financial structure has real effects , since taxes favor debt. However, the cost of debt increases with the debt-to-collateral ratio, and capital is part of collateral. The data, for U.S. manufacturing investment from 1954 to 1980, show that the debt-to-collateral ratio moves opposite to the direction suggested by tax rates. However, excluding the Euler equation for debt implies the correct sign for the relation between investment and the debt-to-collateral ratio. I also find structural instability in the Euler equations for debt and capital.

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    Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9210.

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    Date of creation: 1992
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    Handle: RePEc:fip:fedcwp:9210
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