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Long-Term Finance and Investment with Frictional Asset Markets†

Long-Term Finance and Investment with Frictional Asset Markets† AbstractTrading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the United States, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduces long-term financial costs, and promotes investment in longer-term projects. (JEL E43, E44, E52, G12, G21, G32, O16) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Long-Term Finance and Investment with Frictional Asset Markets†

Long-Term Finance and Investment with Frictional Asset Markets†

American Economic Journal: Macroeconomics , Volume 13 (4) – Oct 1, 2021

Abstract

AbstractTrading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the United States, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduces long-term financial costs, and promotes investment in longer-term projects. (JEL E43, E44, E52, G12, G21, G32, O16)

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Publisher
American Economic Association
Copyright
Copyright © 2021 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20190353
Publisher site
See Article on Publisher Site

Abstract

AbstractTrading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the United States, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduces long-term financial costs, and promotes investment in longer-term projects. (JEL E43, E44, E52, G12, G21, G32, O16)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Oct 1, 2021

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