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Federal Reserve Bank of St. Louis
Working Papers
Long-Term Finance and Investment with Frictional Asset Markets
Julian Kozlowski

This paper develops a theory of investment and maturity choices and studies its implications for the macroeconomy. The novel ingredient is an explicit secondary market with trading frictions which leads to a liquidity spread which increases with maturity and generates an upward sloping yield curve. As a result, trading frictions induce firms to borrow and invest at shorter horizons than in a frictionless benchmark. Economies with more severe frictions exhibit a steeper yield curve which further affects maturity and investment choices of rms. A model calibrated to match cross-country moments suggests that reductions in trading frictions-a new channel of financial development-can promote economic development. A policy intervention with government-backed financial intermediaries in the secondary market can improve liquidity and reduce the cost of long-term finance which promotes investment in longer-term projects and generates substantial welfare gains.

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Julian Kozlowski, Long-Term Finance and Investment with Frictional Asset Markets, Federal Reserve Bank of St. Louis, Working Papers 2018-12, 29 Dec 2017.
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Keywords: Debt maturity; Over-the-counter market; Liquidity; Secondary markets
DOI: 10.20955/wp.2018.012
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