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∗ We are grateful to Mark Gertler for his constant encouragement and advice. We also thank (2002)
BibTeX
@MISC{Pratap02∗we,
author = {Sangeeta Pratap and Silvio Rendón and Centro De Investigación Económica and U. Carlos Iii and U. Pompeu Fabra and Chris Flinn and Boyan Jovanovic and Simon Gilchrist and Ramon Marimon and Tom Sargent and Harald Uhlig and Guillaume Rabault and Egon Zakrajsek We},
title = {∗ We are grateful to Mark Gertler for his constant encouragement and advice. We also thank},
year = {2002}
}
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Abstract
Abstract.- We set up a dynamic model of firm investment in which liquidity con-straints enter explicitly into the firm’s maximization problem. The optimal policy rules are incorporated into a maximum likelihood procedure to estimate the structural parameters of the model. Investment is positively related to the firm’s internal finan-cial position when the firm is relatively poor. This relationship disappears for wealthy firms, which can reach their desired level of investment. Borrowing is an increasing function of financial position for poor firms. This relationship is reversed as a firm’s financial position improves, and large firms hold little debt. We find that liquidity con-straints matter significantly for the investment decisions of firms. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is about 6 % higher over a period of 20 years. Transitory interest rate shocks have a sustained impact on capital accumulation, which lasts for several peri-ods.
