Real Versus Financial Frictions to Capital Investment
49 Pages Posted: 29 Dec 2005
Date Written: December 2005
We formulate and estimate a structural model of firm investment behavior that specifies the exact channel through which financial frictions bite. The model also allows for the existence of both convex and non-convex costs to adjusting capital. Essentially, we move beyond simply testing and rejecting a neoclassical model without frictions. Our quantitative estimates show that both real and financial frictions have an important effect on firm investment dynamics.
Keywords: investment, adjustment costs, financing constraints
JEL Classification: E22
Suggested Citation: Suggested Citation