Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations

57 Pages Posted: 1 Jan 2013 Last revised: 21 May 2014

See all articles by Andrea Ajello

Andrea Ajello

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 2014

Abstract

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 40% of GDP and 60% of investment volatility.

Keywords: DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Capital expenditure financing

JEL Classification: E30, E22, E44, C11, G1, G21, G30

Suggested Citation

Ajello, Andrea, Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations (March 2014). FEDS Working Paper No. 2012-67, Available at SSRN: https://ssrn.com/abstract=2195195 or http://dx.doi.org/10.2139/ssrn.2195195

Andrea Ajello (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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