Imperfect financial contracting and macroeconomic stability

This paper studies the implications of imperfect financial contracting for macroeconomic stability in the context of a stochastic dynamic general equilibrium model. We find that the equilibrium growth path might be indeterminate in an economy with financing frictions even if the aggregate production function exhibits constant returns to scale. Self-fulfilling expectations about the future price of capital lead to macroeconomic fluctuations in this economy.