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A Dynamic General Equilibrium Framework of Investment with Financing Constraint

  • Chi-wa Yuen

    (University of Hong Kong)

  • Danyang Xie

    (International Monetary Fund)

In this paper, we provide a dynamic general equilibrium framework with an explicit investment-financing constraint. The constraint is intended as a reduced form to capture the balance sheet effects that have been widely regarded as an important determinant of financial crises. We derive a link between the value of the firm and social welfare. We find that the value of the firm can be greater with the constraint. Our model also sheds light on how the effects of productivity shocks and investors' misperception of productivity shocks may be amplified by the financing constraint.

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File URL: http://128.118.178.162/eps/mac/papers/0207/0207009.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0207009.

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Length: 25 pages
Date of creation: 22 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0207009
Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP; pages: 25; figures: Included
Contact details of provider: Web page: http://128.118.178.162

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  1. James R. Barth & Gerard Caprio, Jr. & Ross Levine, 2002. "Bank Regulation and Supervision: What Works Best?," NBER Working Papers 9323, National Bureau of Economic Research, Inc.
  2. Chang, R. & Velasco, A., 1998. "Financial Fragility and the Exchange Rate Regime," Working Papers 98-05, C.V. Starr Center for Applied Economics, New York University.
  3. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  4. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  5. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  6. Shankha Chakraborty & Tridip Ray, 2003. "Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis," University of Oregon Economics Department Working Papers 2003-6, University of Oregon Economics Department, revised 01 Feb 2002.
  7. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  8. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  9. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  10. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
  11. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
  12. Anil K Kashyap & Jeremy C. Stein, 1994. "The Impact of Monetary Policy on Bank Balance Sheets," NBER Working Papers 4821, National Bureau of Economic Research, Inc.
  13. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  14. Chami, Ralph & Cosimano, Thomas F., 2010. "Monetary policy with a touch of Basel," Journal of Economics and Business, Elsevier, vol. 62(3), pages 161-175, May.
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