Financial Development, Long-Term Finance and the Macroeconomy: The Role of Secondary Markets

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Abstract

The paper develops a dynamic general equilibrium model of financial markets
and macroeconomy. In the model, long-term debt is extended to firms in a
primary market and then traded in a secondary market among financiers. Two
financial frictions that are ex-ante and ex-post with respect to the secondary
market trading date raise the cost of debt finance. In stationary equilibrium,
while ex-ante frictions are always counterproductive, financing costs that are
ex-post could promote macroeconomic growth. I show that a model consistent
with the U.S. financial development experience of the last 30 years is likely to
exhibit declining ex-post frictions.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages49
Volume2014-004
Publication statusPublished - 27 Aug 2014

Publication series

NameEBC Discussion Paper
Volume2014-004

Keywords

  • microfoundations of financial frictions
  • long-term investment
  • secondary markets

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