A Dynamic General Equilibrium Framework of Investment with Financing Constraint

Author/Editor:

Danyang Xie ; Chi-Wa Yuen

Publication Date:

February 1, 2002

Electronic Access:

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Summary:

In this paper, we provide a dynamic general equilibrium framework with an explicit investment-financing constraint. The constraint is intended as a reduced form to capture the balance sheet effects, which have been widely regarded as an important determinant of financial crises. We derive a link between the value of the firm and the social welfare and we find that the value of the firm can be greater with than without the constraint. Our model also sheds light on how the effects of productivity shocks and bubbles may be amplified by the financing constraint.

Series:

Working Paper No. 02/41

Subject:

English

Publication Date:

February 1, 2002

ISBN/ISSN:

9781451846119/1018-5941

Stock No:

WPIEA0412002

Format:

Paper

Pages:

22

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