A Dynamic General Equilibrium Framework of Investment with Financing Constraint

22 Pages Posted: 30 Jan 2006

See all articles by Danyang Xie

Danyang Xie

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance

Date Written: February 2002

Abstract

In this paper, we provide a dynamic general equilibrium framework with an explicit investment-financing constraint. The constraint is intended as a reduced form to capture the balance sheet effects, which have been widely regarded as an important determinant of financial crises. We derive a link between the value of the firm and the social welfare and we find that the value of the firm can be greater with than without the constraint. Our model also sheds light on how the effects of productivity shocks and bubbles may be amplified by the financing constraint.

Keywords: investment constraint, value of the firm

JEL Classification: C61, D92

Suggested Citation

Xie, Danyang and Yuen, Chi-Wa, A Dynamic General Equilibrium Framework of Investment with Financing Constraint (February 2002). IMF Working Paper No. 02/41, Available at SSRN: https://ssrn.com/abstract=879424

Danyang Xie (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

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Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance ( email )

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