Working Paper: NBER ID: w2763
Authors: Mark Gertler
Abstract: This paper characterizes a multi-period production economy in which borrowers and lenders enter long-term financial contracts. A key feature is that aggregate production and borrowers' capacity to absorb debt -- their "financial capacity" - are jointly determined endogenous variables, in the spirit of Gurley and Shaw (1955) Expectations of future economic conditions govern financial capacity, which in turn influences current capacity utilization. Further, disturbances in the present may persist into the future by influencing borrowers' net asset positions. Finally, borrowers may substitute future for current production by preserving their assets in hard times, behavior akin to reliquification as described in Eckstein and Sinai (1986).
Keywords: financial capacity; long-term contracts; production; macroeconomic fluctuations
JEL Codes: E32; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectations of future economic conditions (E66) | Borrowers' financial capacity (G21) |
| Borrowers' financial capacity (G21) | Current capacity utilization (D24) |
| Expectations of future economic conditions (E66) | Current capacity utilization (D24) |
| Disturbances in the present (D59) | Future economic conditions (E66) |
| Disturbances in the present (D59) | Borrowers' net asset positions (G51) |
| Borrowers' net asset positions (G51) | Future economic conditions (E66) |
| Wealth fluctuations (E32) | Production adjustments (E23) |
| Production levels (E23) | Future production (D25) |