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Ralph Chami is an economist in the IMF Institute. Thomas F. Cosimano is Professor of Finance and Economics at the Department of Finance, University of Notre Dame, and Connel Fullenkamp is Professor of Economics at the Department of Economics, Duke University. The authors wish to thank Mohsin Khan, Samir El-Khouri, Abedlhak Senhadji, Andre Santos, Scott Baire, Paul Evans, Matt Higgins, Pam Labadie, as well as seminar participants at the Cleveland Federal Reserve Bank, Indiana University, the International Monetary Fund, Purdue University, and Western Michigan University.
This example is for illustrative purposes only. Bankruptcy is not modeled in this paper.
The nominal claims must be equal to the nominal value of the capital stock, evaluated during the appropriate period.
The latter transaction described here is similar to the “stripping” of interest and principal payments on a portfolio of mortgages.
This example is meant only to be suggestive. Corporate raiders are not modeled in this paper.
In an earlier version, we also included a deterministic trend in production, as is done in King, Plosser, and Rebelo (1988). This does not affect our result, so it is omitted for the sake of clarity.
Throughout the paper, the partial derivative of a general function with respect to its ith argument is denoted by the subscript i.
These assumptions for the capital accumulation equation are identical to Restoy and Rockinger’s (1994).
This implies that the firm may try to learn about the household’s preferences in order to choose the correct discount rate. For the sake of simplicity, and because this is an equilibrium model, we do not introduce firm learning about household time preferences.
The last two conditions insure that there is an initial price level, P0.
Lucas (1982), Lucas and Stokey (1987), Boyle and Young (1988), Labadie (1989), Cooley and Hansen (1989), Boyle (1990), Hodrick, Kocherlakota and Lucas (1991), Giovannini and Labadie (1991), and Boyle and Peterson (1995) also study this effect.
Mackinnon (1987) adds production to the Stockman (1981) model and separates ownership of capital from ownership of stocks. He also shows the presence of a dividend tax in addition to the purchasing power tax in a perfect foresight cash-in-advance model.
The parameter values were chosen to be the following: α = .40; δ = .012; hs = .31; β = .991; γ = 5; ln(ψl0) = .0066; ψ11 = .491; σu = .0089; ln(ψ20) = .00; ψ22 = .95; σ∈ = .007. Thomas Cooley provided the data to reproduce these parameters.
In addition, the investment function Kt+1 =A(Kt, It) was chosen to be the usual Kt+1 =(1- δ)Kt + It.
In Carlstrom and Fuerst (1995) the stochastic case without portfolio rigidities, equations (10) thru (12) can be reduced to (58) and (59) when the capital accumulation equation is given by Kt+1 = (1 — δ)Kt + It- Similarly, the equilibrium conditions for Cooley and Hansen’s (p. 198, 1995) model can be reduced to (58) and (59) when there is no credit good in their model.
It turns out that given the same parameters, both models imply the same steady state. This occurs because it is the uncertainty over the value of household assets that distinguishes the firm model from the household model. In a steady state, there is essentially no uncertainty over the value of household assets. Abel (1985) shows that money is superneutral in this case.
We call this bond commercial paper because it is short-term, unsecured corporate debt that is usually paid off by issuing new paper. These characteristics correspond closely to those of commercial paper.