Economics at your fingertips  

Fiscal Policy and the Cost of External Finance to Firms

Cristina Badarau () and Andreea Semenescu ()

Emerging Markets Finance and Trade, 2010, vol. 46, issue 0, 36-50

Abstract: This study has two objectives. First, it analyzes the influence of corporate income taxes on the cost of external finance to firms in imperfect financial markets, and second, it evaluates the transmission of monetary and tax shocks in this framework. A model is proposed providing evidence on two opposite effects of corporate tax on a firm's external financing cost: a positive effect is induced by the traditional tax shield channel, while a negative effect comes from the firm's balance sheet channel. The dominance of one of these effects depends on firms' financial health. In a simple dynamic stochastic general equilibrium (DSGE) model, the presence of taxes amplifies the macroeconomic reaction of the real variables to monetary shocks, thus amplifying the financial accelerator role of the firm's balance sheet. As in the case of monetary shocks, the balance sheet channel acts equally in the model as an accelerator for the transmission of tax shocks.

Keywords: corporate tax; external finance premium; financial accelerator; imperfect credit market; investment decision of firms (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Emerging Markets Finance and Trade from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

Page updated 2020-07-26
Handle: RePEc:mes:emfitr:v:46:y:2010:i:0:p:36-50