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Debt, equity and the Equity price puzzle

Author

Listed:
  • Finocchiaro, Daria

    (Research Department, Central Bank of Sweden)

  • Mendicino, Caterina

    (Monetary Policy Research)

Abstract

We show that in a model with equity and debt financing, the specfication of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact.

Suggested Citation

  • Finocchiaro, Daria & Mendicino, Caterina, 2015. "Debt, equity and the Equity price puzzle," Working Paper Series 314, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0314
    as

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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2015/rap_wp314_151221.pdf
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    References listed on IDEAS

    as
    1. Lawrence J. Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary policy and stock market booms," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 85-145.
    2. Walentin, Karl, 2014. "Expectation driven business cycles with limited enforcement," Economics Letters, Elsevier, vol. 124(2), pages 300-303.
    3. Shi, Shouyong, 2015. "Liquidity, assets and business cycles," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 116-132.
    4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    5. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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