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Adjustment costs, financial frictions and aggregate investment

Lookup NU author(s): Dr Fabrizio Casalin



This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).


We develop a simple theoretical model of investment under the assumption that financial frictions generate adjustment costs different from those of industrial origin that are normally discussed in the literature. We identify several restrictions that are used to test and estimate the model using aggregate data for the United States. We find strong evidence that adjustment costs on external finance are significant. We then investigate whether the availability of external finance affects investment of non-financial corporations. We find that a strong relationship holds between financial flows and investment. Shocks to investment have a persistent impact on external finance, whereas the impact on investment of external finance shocks is less persistent.

Publication metadata

Author(s): Casalin F, Dia E

Publication type: Article

Publication status: Published

Journal: Journal of Economics and Business

Year: 2014

Volume: 75

Pages: 60-79

Print publication date: 11/06/2014

Online publication date: 01/09/2014

Acceptance date: 03/06/2014

Date deposited: 17/03/2015

ISSN (print): 0148-6195

Publisher: Elsevier Inc.


DOI: 10.1016/j.jeconbus.2014.06.001


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