The price of capital and the financial accelerator Articles uri icon

publication date

  • December 2016

start page

  • 86

end page

  • 89

volume

  • 149

International Standard Serial Number (ISSN)

  • 0165-1765

Electronic International Standard Serial Number (EISSN)

  • 1873-7374

abstract

  • The price of capital is a key determinant of the financial accelerator, a transmission mechanism of shocks generated through the capital accumulation process of entrepreneurs that borrow in credit markets with frictions. This paper shows that the procedure of approximating the price of old capital by the net-of-depreciation price of new capital, as used in many articles since Bernanke et al. (1999), has profound implications when the capital depreciation rate is positive. When accounting for the appropriate price of capital, the effects of the financial accelerator are even stronger than originally assessed. (C) 2016 Elsevier B.V. All rights reserved.

keywords

  • financial accelerator; business fluctuations; investment adjustment cost; optimal-contracts