The impact of different types of borrowing constraints in a heterogeneous firm model

Most quantitative macroeconomic models with financial frictions assume collateral constraints as a borrowing constraint. However, recent studies show that most non-financial corporate debts in the U.S. are based on the value of cash flow from firms' continuing operations. This paper quantitatively evaluates the impact of different types of borrowing constraints by constructing a heterogeneous firm model with financial frictions. In the steady-state, the type of borrowing constraints influences the structure of a firm's assets. However, the difference is not prominent because few firms are affected much by the type of borrowing constraints. The type of borrowing constraints makes a significant difference in the response of aggregate debt. It has been shown that financial heterogeneity mitigates the influence of the borrowing constraints on aggregate debt dynamics, but default risks can increase the influence of borrowing constraints.