We show that in a model with equity and debt financing, the specification of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and...

This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments...