Working Paper

Misallocation and Credit Market Constraints: the Role of Long-Term Financing

Abstract: We measure aggregate productivity loss due to credit market constraints in a model with endogenous borrowing constraints, long-duration bonds, and costly equity payouts. Due to long-duration bonds, the model generates a realistic distribution of credit spreads. We structurally estimate our model using firm-level data on credit spreads from Thomson Reuters Bond Security Data and balance sheet data from Compustat. Credit market constraints increase aggregate productivity by 0.4% through their effect on the credit spread distribution. However, credit market constraints also interact with costly equity payouts, resulting in an overall productivity loss equal to 1.6%.

Keywords: misallocation; endogenous borrowing constraints; long-duration bonds;

JEL Classification: E23; E44; G32; O47;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2019-01-16

Number: 19-1

Pages: 53 pages