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Expectation Driven Business Cycles with Limited EnforcementKarl WalentinSveriges Riksbank April 2009 Sveriges Riksbank Research Paper Series No. 60 Sveriges Riksbank Working Paper Series No. 229 Abstract: We explore the implications of shocks to expected future productivity. In a setting with limited enforcement of financial contracts, firms have to post collateral to obtain external finance. In a real one-sector model with this type of "collateral constraint", positive news about future productivity implies an increase in stock prices, as well as the other properties of an expectation-driven business cycle. Furthermore, these properties are obtained with standard consumption preferences and capital adjustment costs.
Number of Pages in PDF File: 37 Keywords: news shocks, limited enforcement, collateral constraints, stock prices JEL Classification: E22, E32, E44, E52 working papers seriesDate posted: October 12, 2009 ; Last revised: October 27, 2011Suggested CitationContact Information
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