Real Versus Financial Frictions to Capital Investment

49 Pages Posted: 29 Dec 2005

See all articles by Nihal Bayraktar

Nihal Bayraktar

Pennsylvania State University - School of Business Administration; World Bank

Plutarchos Sakellaris

University of Maryland - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Philip Vermeulen

European Central Bank (ECB)

Date Written: December 2005

Abstract

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

Bayraktar, Nihal and Sakellaris, Plutarchos and Vermeulen, Philip, Real Versus Financial Frictions to Capital Investment (December 2005). ECB Working Paper No. 566. Available at SSRN: https://ssrn.com/abstract=868439

Nihal Bayraktar (Contact Author)

Pennsylvania State University - School of Business Administration ( email )

777 West Harrisburg Pike
Middletown, PA 17057-4898
United States
+1 717 948 6142 (Phone)

HOME PAGE: http://www.personal.psu.edu/nxb23/

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Plutarchos Sakellaris

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Philip Vermeulen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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