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Investment, Financing Constraints and the Euler Equation

Author

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  • Enrico Saltari
  • Giuseppe Travaglini

Abstract

In what follows, we show that financing constraints affects firm's investment decisions before the constraints is binding. This occurs because the firm anticipates at the current time the future bound. We argue that, even with imperfect capital markets, investment policy must be such that there are no arbitrage opportunities at any time. Contrary to the usual "expectations view", this forward looking behavior guarantees the respect of the Euler quation even when the restriction is binding, that is the optimality of the constrained investment decisions.

Suggested Citation

  • Enrico Saltari & Giuseppe Travaglini, 2002. "Investment, Financing Constraints and the Euler Equation," Working Papers 50, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp50
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financing constraints; Firm behaviour dynamics.;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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