A Model of Financial Constraint on Investment

Abstract

This article aims to contribute to the Post Keynesian theory of the firm by refining the long run financial frontier models with three key elaborations reflecting (1) banking convention, such as debt service coverage ratio and the maximum gearing ratio, (2) portfolio approach in firm’s allocation of liquid financial resources, and (3) the role of uncertainty. The refined model provides a medium run perspective of the financial frontier. It also develops a microeconomic foundation to account for investment volatilities, leading to Minsky’s insight into financial instability.