Firm Investment in Imperfect Capital Markets: A Structural Estimation

Review of Economic Dynamics, 2003, vol. 6, issue 3, 513-545

Abstract: In this paper we characterize and estimate the degree to which liquidity constraints affect real activity. We set up a dynamic model of firm investment and debt in which liquidity constraints enter explicitly into the firm's maximization problem, so that investment depends positively on the firm's financial position. The optimal policy rules are incorporated into a maximum likelihood procedure to estimate the structural parameters of the model. We identify liquidity constraints from the dynamics of a firm's evolution, as formalized by the dynamic estimation process, and find that they significantly affect investment decisions of firms. Firms ability to raise equity is about 73% of what it would have been under free capital markets. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is about 6% higher over a period of 20 years. Transitory interest rate shocks have a sustained impact on capital accumulation, which lasts for several periods. (Copyright: Elsevier)

Keywords: Investment; Liquidity constraints; Estimation of dynamic structural models; Financial accelerator (search for similar items in EconPapers)
JEL-codes: C51 E22 E32 E5 G31 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (11)

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Working Paper: Firm investment in imperfect capital markets: A structural estimation (1998)
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DOI: 10.1016/S1094-2025(03)00019-X

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