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Financial Frictions, Investment Delay and Asset Market Interventions

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  • Shouyong Shi
  • Christine Tewfik

Abstract

We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the US data, we quantitatively examine how aggregate activity is affected by a shock to equity liquidity and a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment.

Suggested Citation

  • Shouyong Shi & Christine Tewfik, 2013. "Financial Frictions, Investment Delay and Asset Market Interventions," Working Papers tecipa-501, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-501
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
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    5. Julia K. Thomas & Aubhik Khan, 2011. "Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity," 2011 Meeting Papers 1333, Society for Economic Dynamics.
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    Cited by:

    1. Werner, Maximilian, 2023. "Occasionally binding liquidity constraints and macroeconomic dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).

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    More about this item

    Keywords

    Financial frictions; Liquidity; Asset market interventions; Investment delay; Equity; Collateral.;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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