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Financial Frictions, Investment Delay and Asset Market Interventions

  • Shouyong Shi
  • Christine Tewfik

We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the US data, we quantitatively examine how aggregate activity is affected by a shock to equity liquidity and a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-501.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-501.

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Length: Unknown pages
Date of creation: 04 Oct 2013
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-501
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, vol. 101(2), pages 877-99, April.
  2. Andrea Ajello, 2012. "Financial intermediation, investment dynamics and business cycle fluctuations," Finance and Economics Discussion Series 2012-67, Board of Governors of the Federal Reserve System (U.S.).
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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