Long-Term Finance and Investment with Frictional Asset Markets

Julian Kozlowski

American Economic Journal: Macroeconomics, 2021, vol. 13, issue 4, 411-48

Abstract: Trading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the United States, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduces long-term financial costs, and promotes investment in longer-term projects.

JEL-codes: E43 E44 E52 G12 G21 G32 O16 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Long-Term Finance and Investment with Frictional Asset Markets (2017)
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DOI: 10.1257/mac.20190353

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