American Economic Journal: Macroeconomics
no. 4, October 2021
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.
"Long-Term Finance and Investment with Frictional Asset Markets."
American Economic Journal: Macroeconomics,
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Equities; Fixed Income Securities
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance