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Federal Reserve Bank of Richmond
Working Paper
Misallocation and Credit Market Constraints: the Role of Long-Term Financing
Marios Karabarbounis
Patrick Macnamara
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%.


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Marios Karabarbounis & Patrick Macnamara, Misallocation and Credit Market Constraints: the Role of Long-Term Financing, Federal Reserve Bank of Richmond, Working Paper 19-1, 16 Jan 2019.
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Keywords: misallocation; endogenous borrowing constraints; long-duration bonds
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