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ENDOGENOUS DEBT‐EQUITY RATIO AND BALANCE‐SHEET CHANNEL: IMPLICATIONS FOR GROWTH AND WELFARE
Author(s) -
Shaw Mingfu,
Chang Juinjen,
Fan Chihping
Publication year - 2019
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12152
Subject(s) - economics , monetary economics , debt to equity ratio , equity ratio , gearing ratio , debt , endogenous growth theory , equity (law) , welfare , balance sheet , leverage (statistics) , macroeconomics , internal debt , equity capital markets , finance , debt to gdp ratio , valuation (finance) , population , law , human capital , sociology , political science , market economy , nonprobability sampling , demography , economic growth , computer science , machine learning
This paper endogenizes the debt‐equity ratio and embodies financial leverage in a cash‐in‐advance model of endogenous growth. Our analysis finds that the debt‐equity ratio is positively related to the balanced‐growth rate, since it serves as a ‘financial accelerator’ to stimulate investment projects. Compared to previous studies, this positive relationship gives rise to an additional balance‐sheet effect, which substantially affects the macroeconomic consequences of monetary and taxation policies. Due to the existence of the balance‐sheet effect, we also find that the Friedman rule is not necessarily optimal.