Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations
Federal Reserve Board
I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms’ investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 35% of GDP and 60% of investment volatility.
Number of Pages in PDF File: 55
Keywords: DSGE Model, Financial Frictions, Financial Shocks, Bayesian Estimation, Public Supply of Liquidity, Compustat, Financing Gap, Great Recession
JEL Classification: E22, E3, E41, E44, E51, E52, E58, E62, C11, G1, G21, G3working papers series
Date posted: July 12, 2011 ; Last revised: November 20, 2012
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