Excessive Financing Costs in a Representative Agent Framework

Maya Eden ()

American Economic Journal: Macroeconomics, 2016, vol. 8, issue 2, 215-37

Abstract: This paper highlights a pecuniary externality that results in excessive financing costs. Firms borrow to finance purchases of an inelastically supplied input, bidding up its price. Since higher input prices necessitate more debt obligations, this leads to an increase in intermediation costs. A quantitative interpretation of the model suggests that it is optimal to tax financial intermediation by increasing the borrowing rate by 3 percentage points. (JEL E13, E44, G21, G32, H21, H25)

JEL-codes: E13 E44 G21 G32 H21 H25 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/mac.20140147
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Citations: View citations in EconPapers (3)

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