Uncertainty Shocks and Corporate Borrowing Constraints

Ahmed Kamara () and Niraj P. Koirala ()
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Ahmed Kamara: College of Business, Texas A&M University-Corpus Christi, 6300 Ocean Drive, Corpus Christi, TX 78412, USA
Niraj P. Koirala: Department of Economics and Statistics, California State University Los Angeles, 5154 State University Dr, Los Angeles, CA 90032, USA

IJFS, 2023, vol. 11, issue 1, 1-35

Abstract: In this paper, we study the effects of uncertainty shocks in a quantitative framework where firms in the corporate sector are constrained by credit. Specifically, we formulate borrowing constraints as a nested function that features both earnings and capital as alternative instruments for assessing credit worthiness, in line with recent trends in corporate finance. We find that the quantitative framework that incorporates only one instrument (capital or earnings) in the borrowing constraint falls short in matching the business cycle properties of the US economy in terms of the behavior of output, inflation, and the price markup which are an essential part of the literature on uncertainty shocks. Rather, a hybrid formulation of the borrowing constraint which accounts for both capital and earnings helps us bring the results in the quantitative model closer to the data.

Keywords: uncertainty shocks; earnings-based constraints; assets-based constraints (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2023
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