ENDOGENOUS DEBT‐EQUITY RATIO AND BALANCE‐SHEET CHANNEL: IMPLICATIONS FOR GROWTH AND WELFARE

ABSTRACT This paper endogenizes the debt‐equity ratio and embodies financial leverage in a cash‐in‐advance model of endogenous growth. Our analysis finds that the debt‐equity ratio is positively related to the balanced‐growth rate, since it serves as a ‘financial accelerator’ to stimulate investment...

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Bibliographic Details
Published in:Bulletin of economic research 2019-07, Vol.71 (3), p.219-239
Main Authors: Shaw, Ming‐fu, Chang, Juin‐jen, Fan, Chih‐ping
Format: Article
Language:English
Subjects:
agency cost
balance‐sheet channel
capital structure
Debt
E52
E63
Economic models
Endogenous
Equity
Financial ratios
G32
growth and welfare
Growth rate
Leverage
Macroeconomics
monetary and tax policies
O16
O42
Taxation
Welfare
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Summary:ABSTRACT This paper endogenizes the debt‐equity ratio and embodies financial leverage in a cash‐in‐advance model of endogenous growth. Our analysis finds that the debt‐equity ratio is positively related to the balanced‐growth rate, since it serves as a ‘financial accelerator’ to stimulate investment projects. Compared to previous studies, this positive relationship gives rise to an additional balance‐sheet effect, which substantially affects the macroeconomic consequences of monetary and taxation policies. Due to the existence of the balance‐sheet effect, we also find that the Friedman rule is not necessarily optimal.
ISSN:0307-3378
1467-8586
DOI:10.1111/boer.12152