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Working Paper

Debt, Collateral, And U.S. Manufacturing Investment: 1954-1980

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I perform an empirical analysis of Euler equations for the firm’s choices of capital, labor, hours, and debt. Financial structure has real effects, since taxes favor debt. However, the cost of debt increases with the debt-to-collateral ratio, and capital is part of collateral. The data, for U.S. manufacturing investment from 1954 to 1980, show that the debt-to-collateral ratio moves opposite to the direction suggested by tax rates. However, excluding the Euler equation for debt implies the correct sign for the relation between investment and the debt-to-collateral ratio. I also find structural instability in the Euler equations for debt and capital.
09.01.1992ISSN 2573-7953 WP 92-10DOI 10.26509/frbc-wp-199210

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Osterberg, William P. 1992. “Debt, Collateral, And U.S. Manufacturing Investment: 1954-1980.” Federal Reserve Bank of Cleveland, Working Paper No. 92-10. https://doi.org/10.26509/frbc-wp-199210