In this paper, we analyse the effects of transitory fiscal expansions when public debt is used as liquidity by the private sector. We conduct this analysis in an incomplete market model where agents face uninsurable idiosyncratic income risk and have limited ability to borrow against future income (i.e., markets are iliquidity constrained in the terminology of Kehoe and Levine, 2001, amongst others). Non Ricardian models of this type have on occasion been used to analyse the aggregate and welfare effects of public debt in the steady state (see Woodford, 1990; Aiyagari and McGrattan, 1998). To date, there have been surprisingly few attempts at clarifying how such economies respond to aggregate fiscal shocks. One important contribution is Heathcote (2005), who offers a quantitative assessment of the effect of tax cuts. In this paper, we attempt to characterise analytically and qualitatively the impact and dynamic effects of government spending shocks on macroeconomic aggregates.
The spending shocks of which we analyse the effects have one significant, and realistic, feature: they are at least partly financed by government bond issues in the short run, with public debt then gradually reverting to some long run target value thanks to future tax increases. Note that whether government spending is financed by taxes or debt does not matter in complete markets, Ricardian economies with lump sum taxation, because households discounted disposable income flows are identical between alternative modes of government financing. Then, under reasonable assumptions about preferences and technology, the negative wealth effects associated with transitory spending shocks lead to falls in the demand for both private consumption and leisure, which in turn produces a drop in the real wage (e.g., Baxter and King, 1993).
We use the link between financial constraints and a firm’s demand for liquidity to develop a new test of the effect of financial constraints on firm policies. The effect of financial constraints can be captured by a firm’s propensity to save cash out of incremental cash inflows (the cash flow sensitivity of cash). While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms’ cash savings should not be systematically related to cash flows. We estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971-2000 period and find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not. Also consistent with our argument, we find that constrained firms’ cash flow sensitivity of cash increases during recessions, while unconstrained firms’ cash—cash flow sensitivity is unaffected by macroeconomic innovations. The use of cash flow sensitivities of cash appears to be a theoretically justified, empirically useful method to test for the importance of financial constraints.
Two important areas of research in corporate finance are the effects of financial constraints, and the manner in which firms perform financial management. These two issues, although often studied separately, are fundamentally linked. As originally proposed by Keynes (1936), a major advantage of a liquid balance sheet is that it allows firms to undertake valuable projects when they arise. However, Keynes also argued that the importance of balance sheet liquidity is influenced by the extent to which firms have access to external capital markets (p. 196). If a firm has unrestricted access to external capital – that is, if a firm is financially unconstrained – there is no need to safeguard against future investment needs and corporate liquidity becomes irrelevant. Despite the link between financial constraints and corporate liquidity demand, the literature that examines the effects of financial constraints on firm behavior has traditionally focused on corporate investment demand.
Not the least interesting of the many remarkable properties of diamond is that it emits visible light on excitation by appropriate methods.Many investigators have studied the luminescence of diamond since Robert Boyle in 1663 published his observations of the phenonienon. To the methods of exciting luminescence described by him, viz., light, heat and friction, the advance of knowledge has added others, viz., cathode-ray bombardment and X-rays. It has also provided instruments, viz., the phosphoroscope and the spectroscope for the critical study of the phenomenon and extended the range of temperatures over which it maybe. observed downwards to the lowest values. A full summary of the earlier investigations is given in the fourth volume of Kayser's Handbuch (1908). In view of the fact that diamond is an elementary solid and is the typical valehce crystal, it mi&t have been supposed that its behaviqur would figure prominently in any account of the subject of luminescence. Far from this being the case, the luminescence of diamond does not even find a mention in the two bulky treatises written by Lenard for the Handbuch der Experimental Physik, or in Pringsheim's article of 1928 in the Handbuch der Physik.
The reason for this lack of interest is clear from the brief reference thade in Pringsheim's book (1928) and in his earlier Handbuch article (1926), namely the belief that the centres of luminescence in diamond are not the atoms of carbon of which it is composed, but some foreign atoms of undetermined identity present in it as impurity. The basis for this belief has been the variability of the intensity and colour of the emitted light, and the fact that not all diamonds show the phenomenon. The impurities suggested in the literature as the origin of the luminescence make a lengthy list, viz., samarium, yttrium, sodium, aluminium, chromium, iron and titanium, and include even some hydrocarbons! The considerations regarding the crystal symmetry and structure of diamond developed in the introductory paper of this Symposium (Raman 1944) enable us to make a fresh approach to the problem of its luminescence. It is proposed to give a general outline of the experimental facts regarding the luminescence properties of diamond and to show that they fit naturally into the framework of the ideas developed in that paper, while, on the other hand, the facts remain wholly unintelligible on the impurity hypothesis.
