Persistence and Amplification of Financial Frictions

Abstract

We quantitatively evaluate the various types of working capital loans affected by borrowing constraints using a simple real business cycle model. We explore which borrowing constraints generate persistence and/or amplified output responses to productivity and financial shocks. We find that limiting investment on account of borrowing constraints generates a persistent response to a one-time transitory shock. This finding implies that investment wedge plays an important role in generating persistence. There is a trade-off relationship between persistence and amplification among models and the working capital loan channel does not always generate amplification