nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2008‒07‒14
two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. "Capital Structure Over The Business Cycle" By David Amdur
  2. Regional development and monetary policy : a review of the role of monetary unions, capital mobility and locational effects By Ridhwan, M.M.; Nijkampa, P.; Rietveld, P.

  1. By: David Amdur (Department of Economics, Georgetown University)
    Abstract: Why are aggregate equity payouts and debt issued positively correlated over the business cycle in U.S. data? Standard real business cycle (RBC) models have few predictions about capital structure, because they assume that nancial markets are frictionless. On the other hand, the tradeo theory of capital structure argues that nancial frictions determine rms' optimal mix of debt and equity nancing. We develop an RBC model with nancial frictions and use it to explain some stylized facts about aggregate U.S. debt and equity ows. We document that debt issued and equity payouts are (i) positively correlated with output, (ii) positively correlated with investment, and (iii) positively correlated with each other. Our model can account for these stylized facts. We also calibrate the model to the periods 1952 { 1983 and 1984 { 2007 in order to explain the nding that real variables have become less volatile in the later subperiod, while nancial variables have become more volatile. By varying both the scale of technology shocks and the degree of nancial frictions, we are able to account for both results. Classification-JEL Codes: E32, G32, G35
    Keywords: Debt-equity nance, RBC models, business cycle moderation, corporate nance, capital structure, tradeo theory, payout policy
    Date: 2008–08–03
  2. By: Ridhwan, M.M. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Nijkampa, P.; Rietveld, P.
    Abstract: Standard economic theory assumes money to be neutral, at least in the long run, driven by interregional arbitrage and perfect capital mobility. This may easily be used as a justification for regional economists to ignore monetary factors. However, in a world with market imperfections, such arguments are no longer valid. This paper provides a critical review of theoretical arguments and empirical evidence on the issue. Special attention is devoted to asymmetric information problems caused by geographical factors. We conclude that monetary policy and financial markets can have a potentially important role to play in promoting regional development especially in less-developed countries.
    Keywords: Regional Finance; Monetary Union; Capital Mobility; Asymmetric Regional Finance; Monetary Union; Capital Mobility; Asymmetric;Information; Economic Geography
    JEL: R51 R58 G14 E44 F15
    Date: 2008

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