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...

Economists have traditionally used a simple rule that restricts primary deficits to less than a threshold given by the interest rate growth rate differential and existing debt level to judge fiscal sustainability. This rule derives from a single period application of the government's budget...