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Monetary Policy, Agency Costs and Output Dynamics

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  • Ludger Linnemann
  • Andreas Schabert

Abstract

This paper examines the role of financial market imperfections for output reactions to nominal interest rate shocks. Empirical evidence shows a hump‐shaped impulse response function of output and suggests that credit supply co‐moves with output. A monetary business cycle model with staggered price setting is presented where the firms' outlays for capital and labor must be covered by the sum of net worth of entrepreneurs and loans in the form of debt contracts. These properties are shown to generate a hump‐shaped impulse response of output, which takes on the smooth and persistent appearance of the empirical output response when nominal wages are set in a staggered way, too.

Suggested Citation

  • Ludger Linnemann & Andreas Schabert, 2003. "Monetary Policy, Agency Costs and Output Dynamics," German Economic Review, Verein für Socialpolitik, vol. 4(3), pages 341-364, August.
    • Handle: RePEc:bla:germec:v:4:y:2003:i:3:p:341-364
    DOI: 10.1111/1468-0475.00084
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    References listed on IDEAS

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