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The Dynamic Effects of Firm-Level Borrowing Constraints

John B. Jones
Journal of Money, Credit and Banking
Vol. 35, No. 5 (Oct., 2003), pp. 743-762
Stable URL: http://www.jstor.org/stable/3649826
Page Count: 20
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The Dynamic Effects of Firm-Level Borrowing Constraints
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Abstract

In this paper, I develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms. To do this, I construct an economy where firms face financial constraints, fixed costs, and persistent idiosyncratic shocks. Using numerical methods, I analyze how a large collection of these firms responds to aggregate productivity shocks. A common result is that financial constraints tend to dampen the economy's initial response to aggregate productivity shocks but equity accumulation and exit dynamics amplify the longer-term response. The relative sizes of these two effects, however, are sensitive to firms' environments.

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