Long-Term Finance and Investment with Frictional Asset Markets
نویسنده
چکیده
This paper develops a theory of investment and maturity choices and studies its implications for the macroeconomy. The novel ingredient is an explicit secondary market with trading frictions which leads to a liquidity spread which increases with maturity and generates an upward sloping yield curve. As a result, trading frictions induce firms to borrow and invest at shorter horizons than in a frictionless benchmark. Economies with more severe frictions exhibit a steeper yield curve which further affects maturity and investment choices of firms. A model calibrated to match cross-country moments suggests that reductions in trading frictions—a new channel of financial development—can promote economic development. A policy intervention with government-backed financial intermediaries in the secondary market can improve liquidity and reduce the cost of longterm finance which promotes investment in longer-term projects and generates substantial welfare gains. JEL Classifications: E44, G30, O16.
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