Corporate Finance and Interest Rate Policy

Alessandro Piergallini

MPRA Paper from University Library of Munich, Germany

Abstract: I develop flexible- and sticky-price general equilibrium models that embody corporate financing decisions affecting firm value because of distortionary taxes. Nominal interest-rate variations impact costs of debt and equity capital asymmetrically and induce firms to modify the financial structure, altering the gap between the (optimization-based) weighted average cost of capital and the real interest rate. Under these circumstances, I demonstrate that passive or mildly active monetary policies ensure aggregate stability. Overly aggressive inflation-fighting actions are destabilizing under sticky prices. Macroeconomic dynamics following either interest-rate normalization or temporary monetary tightening critically depend upon the tax structure and the steady-state debt-equity ratio.

Keywords: Corporate Finance; Firm Financial Structure; Corporate and Personal Taxation; Interest Rate Policy; Equilibrium Dynamics; Monetary Policy Shocks. (search for similar items in EconPapers)
JEL-codes: E31 E52 G32 H24 H25 (search for similar items in EconPapers)
Date: 2024-09-12
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-dge, nep-mon and nep-pbe
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