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Corporate Finance and Interest Rate Policy

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  • Piergallini, Alessandro

Abstract

I develop flexible- and sticky-price general equilibrium models that embody corporate financing decisions affecting firm value because of distortionary taxes. Nominal interest-rate variations impact costs of debt and equity capital asymmetrically and induce firms to modify the financial structure, altering the gap between the (optimization-based) weighted average cost of capital and the real interest rate. Under these circumstances, I demonstrate that passive or mildly active monetary policies ensure aggregate stability. Overly aggressive inflation-fighting actions are destabilizing under sticky prices. Macroeconomic dynamics following either interest-rate normalization or temporary monetary tightening critically depend upon the tax structure and the steady-state debt-equity ratio.

Suggested Citation

  • Piergallini, Alessandro, 2024. "Corporate Finance and Interest Rate Policy," MPRA Paper 122021, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:122021
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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