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Long-Term Finance and Investment with Frictional Asset Markets

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  • Julian Kozlowski

Abstract

Trading frictions in financial markets affect more long- than short-term bonds generating an upward sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the US, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduce long-term financial costs and promotes investment in longer-term projects.

Suggested Citation

  • Julian Kozlowski, 2017. "Long-Term Finance and Investment with Frictional Asset Markets," Working Papers 2018-12, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2018-012
    DOI: 10.20955/wp.2018.012
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    Cited by:

    1. Juan Sanchez & Rodolfo Manuelli, 2016. "Endogenous Debt Maturity: Liquidity Risk vs. Default Risk," 2016 Meeting Papers 1435, Society for Economic Dynamics.
    2. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    3. Donaldson, Jason Roderick & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.
    4. Mahdi Ebsim & Miguel Faria-e-Castro & Julian Kozlowski, 2020. "Corporate Borrowing, Investment, and Credit Policies during Large Crises," Working Papers 2020-035, Federal Reserve Bank of St. Louis, revised 05 Feb 2021.
    5. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Debt maturity; Over-the-counter market; Liquidity; Secondary markets;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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