Macroeconomic implications of financial policy

Algan, Yann; Allais, Olivier; Cárceles‐Poveda, Eva

doi:10.1016/j.red.2009.02.001

Cited by 4 publications

(32 citation statements)

References 19 publications

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“…In the version of the model without capital taxation and beneficial tax treatment of debt, the changes in leverage lead to significant changes in asset prices but do not have quantitatively significant effects on inequality and macroaggregates. This result is consistent with the results of Algan et al (2009), who find that in the Krusell-Smith (1997,1998 setting, Modigliani-Miller theorem holds approximately.…”

Section: Introductionsupporting

confidence: 92%

“…The Modigliani-Miller theorem (see Modigliani and Miller (1958) and Modigliani and Miller (1963)) on the irrelevance of firms' financial (leverage) policy has been shown to be valid in a wide range of environments. Algan et al (2009) have shown that, although the theorem does not hold exactly in an environment with a borrowing constraint, the effects of a change in the representative firms' financial policy is sufficiently small that the theorem holds approximately. This is because, similar to the original models of Krusell and Smith (1997) and Krusell and Smith (1998), most agents are well insured and can offset the effects of the firm's financing decision by adjusting their portfolio.…”

Section: Introductionmentioning

confidence: 95%

“…However, there are not many of such households, and moreover, they hold a very small amount of wealth, so a change in their behavior does not influence the aggregate dynamics. Furthermore, in Algan et al (2009), the equity risk premium is not sufficiently high, as it is common in standard macroeconomic models (Mehra and Prescott, 1985), making the two types of assets similar from the household's point of view.…”

Section: Introductionmentioning

confidence: 99%

“…This paper studies the effects of a change in firm leverage on macroaggregates and wealth inequality in a model with a continuum of households, imperfect markets, borrowing and portfolio choice constraints, and idiosyncratic and aggregate risk. The model augments the Smith (1997, 1998) and Algan et al (2009) models by adding the parsimonious life cycle in the style of Krueger et al (2016), capital depreciation shocks, capital taxation, and accounting for the beneficial tax treatment of debt. These additional features help generate moments from the data in the model, which are essential to match in order to examine the question at hand.…”

Section: Introductionmentioning

confidence: 99%

“…Papers such as Harenberg and Ludwig (2018), Krueger and Kubler (2006) and Gomes et al (2013) add an overlapping-generations (OLG) structure on top of the complexity of Krusell and Smith (1997). One of the more similar models is in Algan et al (2009), which does not have OLG structure, but adds a positive supply of both bonds and capital, which are issued by a leveraged firm. The model in this dissertation adds a parsimonious OLG structure, risk in capital depreciation, and a discrete choice of households whether to participate in the stock market or not.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Firm Leverage and Wealth Inequality

Bakota

2020

SSRN Journal

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This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. The analysis focuses on the particular change in firm leverage that occurred in the U.S. during the 1980s, when firm leverage increased significantly, and subsequently has been dropping since the early 1990s. In the benchmark model, an increase in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. An increase in firm leverage increases average after-tax returns on savings, as firm debt has beneficial tax treatment. This increases the saving rates of all households, and disproportionately increases the saving rates of relatively poorer households. Consequently, the model implies that the increase in firm leverage did not contribute to rising inequality in the U.S. in the 1980s, but rather the opposite; that the reduction in leverage from the early 1990s to 2008 has contributed to rising wealth inequality. Furthermore, I show that if the model abstracts from beneficial tax treatment of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. This is consistent with the previous result in the literature showing that the Modigliani-Miller theorem approximately holds in the heterogeneous agents model with imperfect markets.

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Section: Introductionsupporting

confidence: 92%

Section: Introductionmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Firm Leverage and Wealth Inequality

Bakota

2020

SSRN Journal

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Market Clearing and Krusell-Smith Algorithm in an Economy with Multiple Assets

Bakota

2022

Comput Econ

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This paper proposes a novel method to compute the Krusell and Smith (1997, 1998) algorithm, used for solving heterogeneous-agents models with aggregate risk and incomplete markets when households can save in more than one asset. When used to solve a model with more than one asset, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price) in each period simulated. This procedure entails root-finding in each period, which is computationally expensive. I show that it is possible to avoid root-finding at this level by not imposing equilibria each period, but instead temporarily suspending market clearing. The proposed method then updates the law of motion for asset prices by using the information on the excess demand for assets via a Newton-like method. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model with two assets, the proposed version of the algorithm leads to an 80% decrease in computational time, even when measured conservatively. This method is potentially useful in computing general equilibrium asset-pricing models with risky and safe assets, featuring both aggregate and uninsurable idiosyncratic risk, since methods that use linearisation in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for such models.

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On the irrelevance of financial policy under market incompleteness and trading constraints

Atesagaoglu

Cárceles‐Poveda

2015

Economics Letters

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Abstract.This paper studies the validity of the Modigliani and Miller Irrelevance proposition in the presence of incomplete markets and portfolio restrictions. If the economy is originally in equilibrium and the firm changes its financial plan, we show that there exist state-dependent trading limits under which financial policy is always irrelevant. In addition, the no short-selling constraint usually imposed on equity shares is innocuous in spite of being state-independent, whereas fixed portfolio restrictions on other assets always have real effects if they are part of the firm's capital structure. In this case, however, we find that the quantitative effects of financial policy are relatively small, since households are typically able to almost entirely offset the firm's actions by modifying their portfolio holdings.

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Macroeconomic implications of financial policy

Cited by 4 publications

References 19 publications

Firm Leverage and Wealth Inequality

Firm Leverage and Wealth Inequality

Market Clearing and Krusell-Smith Algorithm in an Economy with Multiple Assets

On the irrelevance of financial policy under market incompleteness and trading constraints

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