By Marco Mazzoli
This publication relates the literatures of finance, business economics and funding to the theoretical framework of the "credit view." First, banks' judgements pertaining to their resources are obvious as not less than as correct as their judgements pertaining to their liabilities. moment, securities and financial institution credits are hugely imperfect substitutes. The interactions among genuine and fiscal sectors are analyzed from the perspective of the economic enterprise, in a version the place the funding and monetary judgements of the company are taken at the same time.
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Extra resources for Credit, Investments and the Macroeconomy: A Few Open Issues
In the model, the debt issued by the firm is assumed to be non-risky: Leland and Pyle show (under rather general conditions) that the ownership share of the firm's investments held by insiders and the value of the firm are positively correlated. Since in the model another correlation exists between the ownership share held by the insiders and the quantity of debt, an indirect link is established between the firm's value and the quantity of debt employed to finance its activity. Such a causal link contradicts Modigliani and Miller's neutrality theorem.
In this framework, bank credit cannot have any relevant role, and the Modigliani-Miller theorem is assumed to apply, so that firms' financial structure is irrelevant. By equating money demand and supply, one obtains the equilibrium interest rate. The assumption of money supply exogeneity has been strongly criticized by Kaldor (1982), who holds it responsible for having exposed the whole Keynesian macroeconomics to the destructive criticism of Milton Friedman and the Monetarist School. The exogeneity of money supply has been rejected not only by the Post-Keynesian tradition but also by other more recent Keynesian approaches.
After the period considered in the analysis of the present section), Narayanan (1988) obtains results similar to those of Myers and Majluf in a model where debt acts as a barrier to entry for low-quality Credit, financial markets and the macroeconomy 23 firms,7 while in an article by Heinkel and Zechner (1990) it is shown how firms can choose investment projects with a negative net present value in a model with asymmetric information in financial markets where shares may happen to be overvalued to an extent that more than compensates shareholders for undertaking investments with a negative net present value.
Credit, Investments and the Macroeconomy: A Few Open Issues by Marco Mazzoli