Separation at the Kink: Reassessing the Fisher Model under Imperfect Capital Markets

Abstract

This paper reassesses the Fisher model under imperfect capital markets. And develop a geometric framework with a piecewise Capital Market Line (CML) and an explicit credit‐limit boundary to capture three pervasive frictions: asymmetric borrowing–lending rates, financing constraints, and policy interventions. The framework shows that when the optimal choice lies at a kink or boundary, investment cannot be separated from financing; firm decisions become endogenously tied to the cost and availability of credit. A case study of Boeing in 2020 corroborates the mechanisms: the collapse in global air travel demand (RPK) tightened funding conditions, producing a kinked CML; subsequent policy backstops flattened the effective borrowing segment and shifted the feasible set outward, enabling large-scale bond issuance and term-structure repair. We derive testable implications (H1–H3) linking spreads, issuance windows, liquidity hoarding, and the timing of capital expenditure. The analysis identifies conditions for approximate separation and highlights nonlinear policy multipliers when firms transition from boundary to interior solutions. The results clarify the model’s scope of applicability and offer practical guidance for crisis-era credit tools and corporate liquidity management.