Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations

112 Pages Posted: 12 Jul 2011 Last revised: 1 Nov 2015

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2012


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, financial intermediaries 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 25% of GDP and 30% of investment volatility.

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, G3

Suggested Citation

Ajello, Andrea, Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations (August 1, 2012). Available at SSRN: or

Andrea Ajello (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States


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