THE EFFECTS OF LENDING AND BORROWING ON THE PRODUCTION-CHAIN
G. Lach · Journal of International Finance Studies · 2017
ABSTRACT This paper presents a production-chain model with financial frictions. Finals goods in the economy are produced using intermediate inputs, which are monopolistically produced by an interval of atom-monopolists, who hire capital and labor for their production in competitive markets and sell their intermediate goods to the final goods producers. Due to financial frictions, some of these monopolists must borrow their capital and labor bills for one period. This paper shows that such a financial friction will lead to changes in the Solow Residual and an efficiency loss in productivity. Measured changes in the Solow Residual can therefore be caused by changes in an endogenous variable, the interest rate, rather than be attributed to exogenous shocks to productivity alone. Keywords Solow Residual, Financial Frictions