We show that in a canonical model with heterogeneous entrepreneurs, financial frictions, and an imperfectly elastic supply of capital, a fall in the interest rate has an ambiguous effect on aggregate economic activity. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, however, this higher demand for capital raises its price and crowds out investment by more productive entrepreneurs. When this reallocation is strong enough, a fall in the interest rate reduces aggregate output. A numerical exploration of the model suggests that this reallocation effect is quantitatively significant and—in response to persistent changes in the interest rate—stronger than the traditional balance-sheet channel. We provide evidence of the reallocation effect using U.S. firm-level data.

We examine how exchange rate shocks propagate to firm outcomes and amplify through working capital and financing frictions. Guided by a model with cash-in-advance constraints on production and external borrowing constraints based on pledgeable income, our analysis exploits firm-specific seasonality and foreign exchange surprises for empirical identification. Using an extensive array of administrative datasets from Türkiye (2010-2024), we find that currency depreciations arriving in main quarters trigger significantly larger contractions in purchases, sales, and production than depreciations in non-main quarters. Bank credit also tightens, with sharper reductions in short-term loans than long-term loans. These effects are strongest for SMEs, highly leveraged, and import-dependent firms, while large firms expand borrowing in line with a flight-to-quality. Construction and services with long cash conversion cycles are particularly exposed. Our results establish a novel source of fragility in production due to working capital and financing frictions: depreciation-induced increases in input costs force cuts in purchases, reduce sales and pledgeable income, and tighten short-term external finance, deepening real economic contractions.

Purpose:This study examines the magnitude and determinants of Input Tax Credit (ITC) refund delays under India’s Goods and Services Tax (GST) regime and analyses their impact on the working capital dynamics of manufacturing Small and Medium Enterprises (SMEs) in Bengaluru’s major industrial clusters. Design:A mixed-methods approach was adopted using primary survey data from 328 manufacturing SMEs across Peenya Industrial Estate, Electronic City Phase II, Bommanahalli–Hebbagodi manufacturing belt and Doddaballapur Industrial Area. The study combines structured questionnaires and qualitative interviews and applies panel-corrected ordinary least squares (OLS), instrumental variable two-stage least squares (IV-2SLS), quantile regression and bootstrapped mediation analysis to evaluate the relationship between ITC delays and firm-level financial outcomes. Findings:Blocked ITC accounts for an average of 21.4% of total current assets among sampled SMEs, extending the cash conversion cycle by about 38 days (p < 0.001). Micro-enterprises experience higher blockage ratios (25.8%), while export-oriented garment and electronics firms face additional delays due to zero-rated supply refund processes. ITC delays significantly increase reliance on informal finance (3.44 percentage points per month of delay) and reduce capital expenditure by 0.41 percentage points per month, with informal credit substitution partially mediating the investment decline. Research limitations/implications: The stu

phases, as human capital become the main engine of economic growth, more equal distribution of income, in the presence of credit constraints, stimulated investment In economics, economic growth is an increase in the quantity and quality of the economic goods and services that a society produces. It can be measured as the increase in the inflation-adjusted output of an economy in a given year or over a period of time. The rate of growth is typically calculated as real gross domestic product (GDP) growth rate, real GDP per capita growth rate, GNI per capita gr The prevailing views about the role of inequality in the growth process has radically shifted in the past century. The classical perspective, as expressed by Adam Smith, and others, suggests that inequality fosters the growth process. Specifically, since the aggregate saving increases with inequality due to higher property to save among the wealthy, the classical viewpoint suggests that inequality stimulates capital accumulation and therefore economic growth. The Neoclassical perspective that is based on representative agent approach denies the role of inequality in the growth process. It suggests that while the growth process may affect inequality, income distribution has no impact on the growth process. The modern perspective which has emerged in the late 1980s suggests, in contrast, that income distribution has a significant impact on the growth process. The modern perspective, originated by Galor and Zeira, highlights the important role of heterogeneity in the determination of aggregate economic activity, and economic growth. In particular, Galor and Zeira argue that since credit markets are imperfect, inequality has an enduring impact on human capital formation, the level of income per capita, and the growth process. In contrast to the classical paradigm, which underlined the positive implications of inequality for capital formation and economic growth, Galor and Zeira argue that inequality has an adverse effect on human capital formation and the development process, in all but the very poor economies. Later theoretical developments have reinforced the view that inequality has an adverse effect on the growth process. Specifically, Alesina and Rodrik and Persson and Tabellini advance a political economy mechanism and argue that inequality has a negative impact on economic development since it creates a pressure for distortionary redistributive policies that have an adverse effect on investment and economic growth. In accordance with the credit market imperfection approach, a study by Roberto Perotti showed that inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while…