Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212301 
Year of Publication: 
2014
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 26/2014
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We study the impact of financing constraints on investment and output dynamics, in a continuous time setting with output a linear function of capital. Decline of net worth reduces investment and, if firms can rent capital to unconstrained outside investors, can create a 'net worth trap' with both investment and output falling below normal levels for long time periods. We provide a detailed account of our model solution and discuss both the economic intuition underpinning our results and the implications for macroeconomic modeling.
Subjects: 
cash flow management
corporate prudential risk
financial accelerator
financial distress
induced risk aversion
liquidity constraints
liquidity risk
macroeconomic propagation
multiperiod financial management
non-linear macroeconomic modelling
Tobin's q
precautionary savings
JEL: 
E44
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-005-7
Document Type: 
Working Paper

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