DP5727 Financial Innovations and Macroeconomic Volatility

Author(s): Urban Jermann, Vincenzo Quadrini
Publication Date: June 2006
Keyword(s): business cycle, debt-equity finance, financing constraints
JEL(s): E3, G1, G3
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5727

The volatility of US business cycle has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatile in the financial structure of firms.