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The Dynamic Effects of Firm-Level Borrowing Constraints
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 35, Number 5, October 2003
- pp. 743-762
- 10.1353/mcb.2003.0037
- Article
- Additional Information
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 analyzehowa large collection of these firmsresponds 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.