American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Reassessing the Relevance of Financial Shocks in an Estimated Heterogeneous Firm Model
American Economic Journal: Macroeconomics
(pp. 131–59)
Abstract
I study the transmission of financial shocks using an estimated heterogeneous firm model. Following a contractionary financial shock, financially constrained firms cut investment, but unconstrained firms increase investment due to the lower capital price and interest rate. After matching the empirical dynamics of prices and the price elasticity of investment, I find a limited role of the unconstrained firms' response in dampening the aggregate investment decline. Nonfinancial capital adjustment friction is the key to generating this result. Without the capital adjustment friction, unconstrained firms' investment becomes unrealistically sensitive to prices, and the model would understate the financial shocks' aggregate relevance.Citation
Guo, Xing. 2024. "Reassessing the Relevance of Financial Shocks in an Estimated Heterogeneous Firm Model." American Economic Journal: Macroeconomics 16 (3): 131–59. DOI: 10.1257/mac.20200447Additional Materials
JEL Classification
- D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E22 Investment; Capital; Intangible Capital; Capacity
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill