The Role of Debt and Equity Finance Over the Business Cycle

Bibliographic Data

ID9712240
AuthorsFrancisco Covas (Federal Reserve Board of Governors), Wouter J Den Haan (London School of Economics and Political Science and CEPR)
Year2012
Volume122
Issue565
Pages1262-1286
Publication date2012-12-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1111/j.1468-0297.2012.02528.x
OpenAlexW2115552436
LanguageEN
Citations received4
References cited38

If equity issuance is introduced into the costly state verification framework and the friction firms face in raising equity is acyclical, then the model cannot simultaneously generate procyclical equity issuance and a countercyclical default rate. This requires a countercyclical equity issuance friction. With a countercyclical friction, the model can also overturn an undesirable feature of the standard debt-only model: dampening of shocks. To quantitatively match observed patterns, the friction in the cost of raising equity has to vary a lot more over the business cycle than can be justified by estimates of cyclical changes in direct equity issuance costs

Business cycle · Debt · Economics · Equity (law · Keynesian economics · Political science · Politics · Accounting · Credit Risk and Financial Regulations · Finance · Fiscal Policies and Political Economy · Law · Monetary Policy and Economic Impact

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