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Endogenous Financial Constraints: Persistence and Interest Rate Fluctuations

Author

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  • Juan Pablo Medina
Abstract
This article analyzes firm dynamics when the entrepreneurs have limited capacity to comply with their financial contracts. We characterize the optimal constrained contract under this imperfection in the presence of productivity and interest rate fluctuations. We show that under the optimal contract, productivity and interest rate fluctuations have amplified effects on the firms’ dynamics, beyond what would be predicted in the case of perfect enforceability. Moreover, the persistence of these fluctuations is higher when the compliance problems are more severe. These findings can be related to the fact that countries with better contract enforceability display deeper financial development and better economic performance.

Suggested Citation

  • Juan Pablo Medina, 2004. "Endogenous Financial Constraints: Persistence and Interest Rate Fluctuations," Working Papers Central Bank of Chile 290, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:290
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_290.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jorge E. Restrepo & Andrea Tokman R., 2005. "Labor Markets and Institutions: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.),Labor Markets and Institutions, edition 1, volume 8, chapter 1, pages 001-016, Central Bank of Chile.
    2. Rómulo A. Chumacero & Klaus Schmidt-Hebbel, 2005. "General Equilibrium Models: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.),General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 1, pages 001-027, Central Bank of Chile.
    3. Jaime C. Guajardo, 2008. "Financial Frictions and Business Cycles in Middle-Income Countries," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.),Current Account and External Financing, edition 1, volume 12, chapter 8, pages 279-344, Central Bank of Chile.
    4. Jaime C. Guajardo, 2007. "Financial Frections and Business Cycles in Middle Income Countries," Working Papers Central Bank of Chile 444, Central Bank of Chile.

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