Borrowing constraints are an important determinant of firm growth and survival. Such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs, such as those required to survive a recession. This paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics. In our model, debt is constrained by the firm’s limited liability and option to default.
A lending contract specifies an initial loan size, future financing, and a repayment schedule. The choice of these variables in turn determines future growth, the firm’s future borrowing capacity, and its ability and willingness to repay. Hence, borrowing constraints and firm dynamics are jointly determined. We study this dynamic design problem.
In this paper, we begin by surveying models of volatility, both discrete and continuous, and then we summarize some selected empirical findings from the literature. In particular, in the first sections of this paper, we discuss important developments in volatility models, with focus on time varying and stochastic volatility as well as the nonparametric volatility estimation. The models discussed share the common feature that volatilities are unobserved, and belong to the class of missing variables. We begin by looking at the key ARCH class of models, followed by a discussion of the class of continuous time processes frequently used in finance and the link between discrete time and continuous time models.
The role monetary aggregates should play, if any, in the conduct of monetary policy remains a controversial issue. While no major central bank relies on monetary targeting, both the European Central Bank and the Swiss National Bank attach considerable weight to monetary variables, in particular broad aggregates, in analysing and forecasting inflation. Of course, this practice reflects the fact that in both economies shocks to velocity have historically tended to be small.
