Credit Horizons
by Nobuhiro Kiyotaki, John Moore, and Shengxing Zhang
Abstract:
Why might firms borrow largely against near-term revenues? Does this mean they are unable to raise much funding against the long-term horizon? In this paper, we develop a model of credit horizons. We use our framework to examine how credit horizons interact with firm dynamics and the evolution of productivities. For an open set of parameters, we find that even though all firms start off identical, their owners may plan different paths for future productivity: some choose to improve and continue for the long haul, others choose to deteriorate and subsequently shut down. A question of particular concern to us is whether persistently low interest rates can stifle aggregate investment and growth. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone: a Pareto deterioration.
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