A Dynamic General Equilibrium Framework of Investment with Financing Constraint

February 1, 2002

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Banking, Consumption, Financial crises, Financial statements, Stocks

Keywords: capital stock, interest rate, WP

Pages:
22
Volume:
2002
DOI:
https://doi.org/10.5089/9781451846119.001
Issue:
041
Series:
Working Paper No. 2002/041
Stock No:
WPIEA0412002
ISBN:
9781451846119
ISSN:
1018-5941

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