Abstract
The work aims to remedy the shortcomings of previous growth models by examining imperfect information and financial constraints in a New Keynesian setting. Capital-market imperfections and related information asymmetries induce agents to be risk averse, and give rise to the net worth of firms and banks. Asymmetric information binds together banks’ lending and firms’ borrowing, effecting the aggregate amount of production and investment and potentially causing instability. The authors theorise that this effect on financial constraints is large and persistent enough to constitute an endogenous determination of cyclical fluctuations as well as of trend.
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