Long-Term Finance and Investment with Frictional Asset Markets
American Economic Journal: Macroeconomics
vol. 13,
no. 4, October 2021
(pp. 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.Citation
Kozlowski, Julian. 2021. "Long-Term Finance and Investment with Frictional Asset Markets." American Economic Journal: Macroeconomics, 13 (4): 411-48. DOI: 10.1257/mac.20190353Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G12 Equities; Fixed Income Securities
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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