Financial Contracting and Macroeconomic Stability

Thomas Steinberger ()
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Thomas Steinberger: CSEF, University of Salerno, http://www.csef.it

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper studies the implications of imperfections in financial contracting for macroeconomic stability in the context of a stochastic dynamic general equilibrium model. We find that the equilibrium growth path might be indeterminate in an economy with financing frictions even if the aggregate production function exhibits constant returns to scale. Self-fulfilling expectations about the future price of capital lead to macroeconomic fluctuations in this economy. Impulse response analysis shows that while consumption and employment are highly procyclical, investment and the market price of capital are predicted to be negatively correlated with output.

Keywords: Indeterminacy; endogenous fluctuations; imperfect financial markets (search for similar items in EconPapers)
JEL-codes: D58 E32 (search for similar items in EconPapers)
Date: 2003-09-01
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Published in Journal of Financial Stability, 2005, vol. 1, pages 451-465

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:104

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