Financial Frictions, Investment Delay and Asset Market Interventions

Shouyong Shi and Christine Tewfik

Working Papers from University of Toronto, Department of Economics

Abstract: 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.

Keywords: Financial frictions; Liquidity; Asset market interventions; Investment delay; Equity; Collateral. (search for similar items in EconPapers)
JEL-codes: E3 G1 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2013-10-04
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Financial Frictions, Investment Delay, and Asset Market Interventions (2015)
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