Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations
American Economic Review
vol. 106,
no. 8, August 2016
(pp. 2256-2303)
Abstract
I use micro data to quantify key features of US firm financing. In particular, I establish that a substantial 35 percent of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, financial intermediaries enable trades of financial assets, directing funds toward investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 25 percent of GDP and 30 percent of investment volatility.Citation
Ajello, Andrea. 2016. "Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations." American Economic Review, 106 (8): 2256-2303. DOI: 10.1257/aer.20120079Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
- E32 Business Fluctuations; Cycles
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill