Is corporate leverage excessive? Is the tax code distorting corporate capital structure decisions in a way that increases the possibility of an economic crisis owing to "financial instability"? <bR><bR>Answering these kinds of questions first requires some precision in terminology. In this paper, we...

Recent research in macroeconomics -- both theoretical and empirical -- has resurrected the idea that capital market imperfections may be significant factors in business volatility by making new progress in characterizing the mechanisms. This paper outlines a case for a financial aspect to...

We present a simple framework that incorporates a role for "interest rate spreads" in models of investment fluctuations. Formally, we develop a simple model of investment and financial contracting under asymmetric information that can he used to generate an Euler equation describing firms'...

This article formalizes the intuition that equity provides firms with a cushion against aggregate fluctuations. We show that equity allows a firm to share aggregate risks with its creditors, minimizing the chance that a recession could push it into financial distress. The tax bias against equity...

This paper develops a simple model of corporate financial structure intended to formalize the macroeconomic concern over excessive leverage. In particular, we attempt to rationalize why firms designing an optimal capital structure would choose a level of debt that leaves them heavily exposed to...