Corporate debt and state-dependent effects of fiscal policy

Daichi Shirai

No 21-007E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: This study analyzes fiscal policies in a business cycle model with an endogenous borrowing constraint when firms are heavily in debt. The tightness of the borrowing constraint for working capital loans depends on the level of corporate debt. When the level of corporate debt is modest, an increase in corporate debt amplifies corporate tax cut multipliers. Because the difference in debt levels due to the temporary tax cut remains for a long time, the cumulative effect on welfare becomes large. If the debt level exceeds a certain threshold, it remains at this level and depresses an economy permanently. In this situation, a permanent spending expansion changes the firms capital structure and can eliminate this inefficiency in the long run.

Pages: 54
Date: 2021-10
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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