Asset Prices, Booms and Recessions: Financial Economics from by Willi Semmler

By Willi Semmler

The ebook reviews the interplay of the monetary industry, financial job and the macroeconomy from a dynamic standpoint. The monetary industry to be studied the following encompasses the money and bond industry, credits industry, inventory industry and foreign currency echange marketplace. financial task is defined via the task of organizations, banks, families, governments and nations. The ebook indicates how monetary job impacts asset costs and the monetary industry and the way asset costs and fiscal marketplace volatility feed again to fiscal job. the point of interest during this ebook is on theories, dynamic versions and empirical proof. Empirical functions relate to episodes of monetary instability and fiscal crises of the united states, Latin American, Asian in addition to Euro-area nations. The booklet isn't just beneficial for researchers and practitioners within the box of monetary engineering, yet is usually very valuable for researchers and practitioners in economics.

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Extra resources for Asset Prices, Booms and Recessions: Financial Economics from a Dynamic Perspective

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Internal funds have lower cost than external finance, there is a financial hierarchy and lastly credit may be procyclical. A multi-period model on the relation of finance and investment has been developed by Fazzari et al. (1988). 8) where πt are profit flows, VN t the new equity issue, ρ the discount rate, and Ωt the premium cost for external finance. Here, too, the hierarchy of finance and the inverse relation of financial risk (default risk) and investment can be derived. Fazzari et al. (1988) also undertake an empirical test of the theory by regressing the investment on cash flows of firms for size classes of firms.

This is likely to mean that the agent will be cut off from loans if he or she approaches the critical curve and, moreover, loans might be recalled. An empirical study on debt sustainability using the intertemporal budget constraint is given in Chap. 4. For a country such a debt constraint means that once the critical level of debt is reached there will be a sudden reversal of capital flows, possibly triggering an exchange rate devaluation or exchange rate crisis that is possibly followed by a financial crisis and large output loss.

28 Chapter 3. Theories on Credit Market, Credit Risk and Economic Activity Y Y* Yt t Fig. 1. Perfect Capital Market condition is, in fact, equivalent to the requirement that the intertemporal budget constraint holds for the agents. More precisely, this means that agents can borrow against future income but the discounted future income, the wealth of the agents, should be no smaller than the debt that agents have incurred. Indeed, models of this type have been discussed in the literature of households, firms, governments and small open economies (with access to international capital markets).

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