The Impact of Government Policies on Firm Financing and Investment: Green Transition, Bank Regulation, and Credit Policies for Development

• Applicant: Dr. Joachim Jungherr
• Subject Area: Economic Theory
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 562633099

The scientific objective of my research project is to assess the impact of government policies on firm financing and investment. Understanding this link is important in order to identify society’s policy options in the face of three major challenges. (1) The effect of climate policies on green firm investment is key for designing effective policy instruments during the green transition. (2) The impact of accounting standards in bank regulation on bank lending and firm investment is crucial for establishing a stable regulatory architecture. (3) The role of credit policies in shaping industrialization and growth in South Korea contains valuable lessons for development and industrial policies today. (1) Green transition: I will provide a quantitative analysis of the interaction between climate policies and financial frictions in shaping corporate green investment and carbon emissions. To this end, I will develop and calibrate a quantitative dynamic heterogeneous firm model of green investment and carbon emissions in the presence of financial frictions. I will use the calibrated model to assess the impact of alternative climate policies along the transition path of the economy. (2) Bank regulation and accounting rules: I will examine the impact of accounting standards in bank regulation on bank lending and firm investment. To provide this analysis, I will build a quantitative dynamic banking model which allows banks to choose the timing of loss recognition subject to accounting rules in place. The calibrated model will allow to study the effects of existing and counterfactual accounting standards on bank lending, firm investment, and financial and macroeconomic stability. (3) South Korea’s growth transition: I will construct a new public data set with a focus on government credit policies in South Korea’s manufacturing sector dating back until the early 1960s. To this end, I will digitize previously unused historical sector-level data on balance sheets, income statements, interest rates, and policy loans. This data set will be used to establish novel empirical facts about the relation between credit policies, firm investment, factor allocation, and trade. These facts will discipline a quantitative dynamic multi-sector small open economy model with heterogenous firms and frictional firm financing. The calibrated model will allow to analyze historical and counterfactual credit policies.

• DFG Programme: Research Grants