Financial Friction and Gains (Losses) from Trade

2020 ◽  
Author(s):  
Mehran Ebrahimian ◽  
Hamid Firooz
Keyword(s):  
Financial Friction

Equilibrium Investment and Asset Prices under Imperfect Corporate Control

2005 ◽  
Vol 95 (3) ◽  
pp. 659-681 ◽  
Author(s):  
James Dow ◽  
Gary Gorton ◽  
Arvind Krishnamurthy
Keyword(s):  
Interest Rates ◽  
Cash Flow ◽  
Asset Prices ◽  
Yield Curve ◽  
Dynamic Equilibrium ◽  
Corporate Control ◽  
Free Cash Flow ◽  
Financial Friction ◽  
And Control ◽  
Important State

We integrate a widely accepted version of the separation of ownership and control—Michael Jensen's (1986) free cash flow theory—into a dynamic equilibrium model, and study the effect of imperfect corporate control on asset prices and investment. Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve. The financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. The shocks propagate through large firms and during booms.

scholarly journals Does corporate ownership affect capital structures and adjustment of capital structures — evidences from Chinese listed companies

2009 ◽  
Vol 6 (4) ◽  
pp. 532-541 ◽  
Author(s):  
Zhengwei Wang ◽  
Wei Lin ◽  
Michael Keefe
Keyword(s):  
Capital Structure ◽  
Transition Economy ◽  
Structural Difference ◽  
Firm Characteristics ◽  
Financial Friction ◽  
Listed Firms ◽  
Optimal Capital Structure ◽  
Study Results ◽  
Optimal Capital ◽  
The Difference

In Chinese transition economy, compared with state-owned firms, private firms face higher financial friction in financing activities, but have more incentive to adjust toward optimal capital structure to maximize the shareholders‟ benefit. Based on panel data of China’s listed firms from 1998 to 2007, we compare the capital structures of state-owned and privately-owned listed firms. The empirical results show that there is structural difference in static capital structure between state-owned and private listed firms while controlling for firm characteristics. We then investigate the difference in dynamics of the capital structure between these two groups of firms. Further study results tell us that the adjustment to an optimal capital structure to be faster for the private firm than for the state-owned firm.

Financial intermediation analysis from financial flows

2019 ◽  
Vol 46 (3) ◽  
pp. 727-747
Author(s):  
Claudio Oliveira De Moraes ◽  
José Americo Pereira Antunes ◽  
Adriano Rodrigues
Keyword(s):  
Financial Stability ◽  
Financial Intermediation ◽  
Dynamic Panel Data ◽  
Financial Friction ◽  
Financial Flows ◽  
Content Type ◽  
Crisis Period ◽  
Data Framework ◽  
Time Frames

Purpose The purpose of this paper is to analyze the financial friction effect of non-performing loans (NPLs) on financial intermediation (FI) through empirical evidence from the Brazilian experience. Design/methodology/approach The authors develop a new variable, financial intermediation flow and a new indicator, FI, both measures of FI. To empirically test FI, the authors use a dynamic panel data framework that draws on 101 banks (December 2000 to December 2015). Findings An increase in NPL reduces FI. Thus, NPL amplifies financial friction in FI. This result holds in different time frames, such as the pre-crisis period, the crisis period and the post-crisis period. Practical implications The FI measure developed in this study offers the policymakers a possibility to monitor financial stability. Originality/value This study adds to this debate by proposing a measure of FI derived from financial flows. This measure allows one to estimate the role of NPL as a financial friction that can pose a threat to financial stability.

Bubbly Recessions

2020 ◽  
Vol 12 (4) ◽  
pp. 33-70
Author(s):  
Siddhartha Biswas ◽  
Andrew Hanson ◽  
Toan Phan
Keyword(s):  
Lower Bound ◽  
Wage Rigidity ◽  
Nominal Wage ◽  
Economic Activities ◽  
Financial Friction ◽  
Secular Stagnation ◽  
Trade Off ◽  
Rigidity Constraint ◽  
Ex Ante ◽  
Nominal Wage Rigidity

We develop a tractable bubbles model with financial friction and downward wage rigidity. Competitive speculation in risky bubbles can result in excessive investment booms that precede inefficient busts, where post-bubble aggregate economic activities collapse below the pre-bubble trend. Risky bubbles can reduce ex ante social welfare, and leaning-against-the-bubble policies that balance the boom-bust trade-off can be warranted. We further show that the collapse of a bubble can push the economy into a “secular stagnation” equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession, such as the Japanese “lost decades.” (JEL E22, E24, E32, E44, L26)

scholarly journals Leverage and the Financial Accelerator in a Liquidity Trap

2011 ◽  
Vol 101 (3) ◽  
pp. 413-416 ◽  
Author(s):  
Karel Mertens ◽  
Morten O Ravn
Keyword(s):  
Lower Bound ◽  
House Price ◽  
Financial Accelerator ◽  
Price Model ◽  
Financial Friction ◽  
Liquidity Trap ◽  
Collateral Constraint ◽  
The Great Depression ◽  
Output Losses ◽  
Large Output

We show that the financial accelerator may be very large in a liquidity trap. We study a sticky price model with real estate and a financial friction specified as a collateral constraint. Expectations can lead the economy to a self-fulfilling liquidity trap equilibrium where the lower bound on the nominal interest rate binds. We model these equilibria as stochastic sunspots. As in the Great Depression, a liquidity trap entails house price depreciation and potentially large output losses. Higher leverage implies much larger output losses but at the same time rules out the existence of short-lived liquidity traps.

WHAT DO WORKING CAPITAL AND HABIT TELL US ABOUT THE CO-MOVEMENT PROBLEM?

2014 ◽  
Vol 20 (1) ◽  
pp. 342-361 ◽  
Author(s):  
Yi-Chan Tsai
Keyword(s):  
Durable Goods ◽  
Habit Formation ◽  
Empirical Studies ◽  
Production Costs ◽  
Working Capital ◽  
Financial Friction ◽  
Nondurable Goods ◽  
Monetary Policy Shock ◽  
Interest Rate Shock ◽  
Movement Problem

Empirical studies find that expenditures on both durable and nondurable goods fall following a contractionary monetary policy shock. However, in standard two-sector models with staggered nondurable goods prices and flexible durable goods prices, consumption of durables rises whereas that of nondurables falls in response to a contractionary policy shock. To resolve this co-movement problem, I extend the model to include a realistic financial friction that firms must pay for their productive inputs prior to production, i.e., working capital, along with habit formation in nondurable goods consumption. Following a positive interest rate shock, the working capital channel raises production costs, thereby discouraging production of both durable and nondurable goods. Furthermore, habit formation induces households to smooth the growth rate of nondurable goods consumption, and hence mitigates the fall in the nondurable goods sector. The model solves the co-movement problem and successfully generates a more sensitive response in the durable goods sector, as observed in the data.

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