Financial Development, Long-Term Finance and the Macroeconomy : The Role of Secondary Markets

The paper develops a dynamic general equilibrium model of financial markets<br/>and macroeconomy. In the model, long-term debt is extended to firms in a<br/>primary market and then traded in a secondary market among financiers. Two<br/>financial frictions that are ex-ante and ex-post with respect to the secondary<br/>market trading date raise the cost of debt finance. In stationary equilibrium,<br/>while ex-ante frictions are always counterproductive, financing costs that are<br/>ex-post could promote macroeconomic growth. I show that a model consistent<br/>with the U.S. financial development experience of the last 30 years is likely to<br/>exhibit declining ex-post frictions