| This dissertation investigates the empirical plausibility of financing constraints and their implications for firm growth and monetary policy.;Chapter 1 investigates whether the modeling strategy of financing constraints employed in many economic models is empirically plausible. I exploit a comprehensive data set of U.S. small business credit contracts. Consistent with the standard model, an additional dollar of net worth accounts for 30-36 cents of external finance. More than two thirds of the business credit contracts can be rationalized by one period debt contracts with costly state verification. The implied bankruptcy cost, 28% of expected output, and rate of return, between 5% and 8% annually, are consistent with studies on bankruptcy incidences and on returns to entrepreneurial investment.;Chapter 2 examines the importance of financing constraints for the evolution of the firm size distribution. Using data from U.S. business credit contracts, I find that firms without access to external financing, either because they were denied credit or because they did not apply for credit expecting to be denied credit, are significantly smaller. Net worth is the limiting factor in firms' financing abilities. The credit amount explained by net worth varies systematically by firm age. I show that a simple model of financing constraints can account for this heterogeneity.;Chapter 3 analyzes the importance of credit, in particular unused commitments, in the evaluation of monetary policy. Standard specifications to identify monetary policy shocks applied to the post-1980s period result in an implausible increase in output in response to a monetary contraction. To improve the identification of monetary policy shocks, this paper uses credit data. Unused commitments of banks to borrowers and the debt capacity of potential borrowers provide information about the intention and ability to invest and consume in the future and therefore are plausible additional proxies for output expectations. The credit-data augmented VAR yields an immediate negative response of output to a contractionary monetary policy shock. |
