Journal of Money, Credit and Banking 35(5), pp. 743-762
October, 2003
Abstract. In this paper I develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms. To do this, I construct an economy where firms face financial constraints, fixed costs and persistent idiosyncratic shocks. Using numerical methods, I analyze how a large collection of these firms responds to aggregate productivity shocks. A common result is that financial constraints tend to dampen the economy's initial response to aggregate productivity shocks, but that equity accumulation and exit dynamics amplify the longer-term response. The relative sizes of these two effects, however, are sensitive to firms' environments.
Computer Code: (Acknowledgement: This code utilizes work by John Rust. Anyone interested in numerical dynamic programming should read his papers and visit his web page.) Underlying GAUSS codes (zipped). The two key files are the "clcns" ones. You can either solve the firm's problem from scratch, or generate time series from an existing set of policy functions. To do the latter, you will have to set the variable "useold" to "1" and you will need the policy vectors contained in the "optpol" files, which you can download here. It will be up to you to make sure the parameters of the model's current iteration are consistent with the parameters used to generate the policy functions. The "Markch" files comprise a GAUSS procedure library. You should load them in the appropriate subdirectories of your "gauss" directory.