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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
    Note: Publisher DOI: 10.1257/mac.20190353
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    3. Mahdi Ebsim & Miguel Faria-e-Castro & Julian Kozlowski, 2020. "Credit and Liquidity Policies during Large Crises," Working Papers 2020-035, Federal Reserve Bank of St. Louis, revised 22 Feb 2024.
    4. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
    5. Weill, Pierre-Olivier, 2020. "The search theory of OTC markets," CEPR Discussion Papers 14847, C.E.P.R. Discussion Papers.
    6. Juan Sanchez & Rodolfo Manuelli, 2016. "Endogenous Debt Maturity: Liquidity Risk vs. Default Risk," 2016 Meeting Papers 1435, Society for Economic Dynamics.
    7. Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.

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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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