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Financial Capacity, Reliquification, and Production in an Economy with Long-Term Financial Arrangements

  • Mark Gertler

This paper characterizes a multi-period production economy in which borrowers and lenders enter long-term financial contracts. A key feature is that aggregate production and borrowers' capacity to absorb debt -- their "financial capacity" - are jointly determined endogenous variables, in the spirit of Gurley and Shaw (1955) Expectations of future economic conditions govern financial capacity, which in turn influences current capacity utilization. Further, disturbances in the present may persist into the future by influencing borrowers' net asset positions. Finally, borrowers may substitute future for current production by preserving their assets in hard times, behavior akin to reliquification as described in Eckstein and Sinai (1986).

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File URL: http://www.nber.org/papers/w2763.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2763.

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Date of creation: Nov 1988
Date of revision:
Publication status: published as "Financial Capacity and Output Fluctuations in an Economy with Multiperiod Financial Relationships." Review of Economic Studies, July 1992,p. 455-492
Handle: RePEc:nbr:nberwo:2763
Note: EFG ME
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  1. Leach, John, 1988. "Underemployment with liquidity-constrained multi-period firms," Journal of Economic Theory, Elsevier, vol. 44(1), pages 81-98, February.
  2. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  3. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  4. Townsend, Robert M., 1988. "Information constrained insurance : The revelation principle extended," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 411-450.
  5. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  6. Grossman, Sanford J & Hart, Oliver D, 1983. "Implicit Contracts under Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 123-56, Supplemen.
  7. Farmer, Roger E A, 1985. "Implicit Contracts with Asymmetric Information and Bankruptcy: The Effect of Interest Rates on Layoffs," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 427-42, July.
  8. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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