Essays in macroeconomics and corporate finance

• Main Author: Perez, Ander
• Published: London School of Economics and Political Science (University of London) 2008
• Subjects: 339
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645739

This thesis consists of three essays at the intersection of macroeconomics and corporate finance. The broad theme that links the three chapters is the study of how endogenous borrowing constraints that affect firms and financial intermediaries influence aggregate investment. In Chapter I, the existing theoretical framework studying how financial constraints in firms may make economies more sensitive to shocks (the 'financial accelerator') is extended to take account of firms' precautionary investment behaviour when they anticipate future liquidity constraints. This behaviour is at the source of a powerful amplification mechanism of shocks, and is also able to account for the documented dynamics of the composition of investment across the business cycle: in particular how risky, illiquid investment as a share of total investment fluctuates both at the firm and at the aggregate level. Chapter II studies how the public supply of liquidity affects the private creation of liquidity by firms (inside liquidity), and how this interacts with firms' demand for liquidity to influence investment and capital accumulation. The conditions under which government debt may boost or reduce private investment are shown to depend on three channels: (1) a crowding-in effect, by enhancing aggregate liquidity, (2) a crowding-out effect, by reducing the collateral value of entrepreneurial assets and (3) a redistributive effect. The model also shows how a production economy with endogenous liquidity can help resolve some important asset pricing puzzles. Finally, the business cycle properties of the model are studied. Chapter III shows how recent developments in financial markets may have made economies less vulnerable to banking crises as they widen access to liquidity, but by relaxing financial constraints facing financial intermediaries, they imply that, should a crisis occur, its impact could be more severe than previously. These effects may be reinforced by greater macroeconomic stability. Finally, financial intermediaries are shown to under-insure and over-borrow from a constrained-efficient viewpoint.