Financial Frictions, Investment Delay, and Asset Market Interventions

Shouyong Shi, Christine Tewfik

Research output: Contribution to journalArticlepeer-review

Abstract

We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the U.S. data, we quantitatively examine how aggregate activity is affected by a shock to equity liquidity and a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment.

Original languageEnglish (US)
Pages (from-to)155-196
Number of pages42
JournalJournal of Money, Credit and Banking
Volume47
Issue numberS2
DOIs
StatePublished - Jun 1 2015

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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