Financial Factors in Business Fluctuations

59 Pages Posted: 23 Apr 2004 Last revised: 17 Jul 2022

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

R. Glenn Hubbard

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Date Written: November 1988

Abstract

Recent research in macroeconomics -- both theoretical and empirical -- has resurrected the idea that capital market imperfections may be significant factors in business volatility by making new progress in characterizing the mechanisms. This paper outlines a case for a financial aspect to business fluctuations, in light of the contributions of this new literature. We present a theoretical model that explicitly motivates how financial factors may affect investment. We then report some existing tests of the model's basic predictions4 and also present two new sets of results. The first demonstrates that the inverse relation between sales variability and size documented in many studies may be due to financial rather than technological factors, in contrast to the conventional view. The second lends support to a theoretical prediction of the model. that the effects of capital market frictions on investment should be asymmetric -- having more impact in recessions than booms. The final section presents conclusions, and addresses some policy questions.

Suggested Citation

Gertler, Mark and Hubbard, Robert Glenn, Financial Factors in Business Fluctuations (November 1988). NBER Working Paper No. w2758, Available at SSRN: https://ssrn.com/abstract=256078

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Robert Glenn Hubbard

Columbia University - Columbia Business School, Finance ( email )

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