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Asymmetric information, financial intermediation, and business cycles

Author

Listed:
  • Kwanghee Nam

    (Korea Economic Research Institute, Seoul 120-090, KOREA)

  • Thomas F. Cooley

    (Simon School of Business, University of Rochester, Rochester, NY 14627, USA)

Abstract

This incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy.

Suggested Citation

  • Kwanghee Nam & Thomas F. Cooley, 1998. "Asymmetric information, financial intermediation, and business cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 599-620.
    • Handle: RePEc:spr:joecth:v:12:y:1998:i:3:p:599-620
    Note: Received: March 20, 1998; revised version: 1 April 1998
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    Citations

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    Cited by:

    1. Smith, R. Todd & van Egteren, Henry, 2005. "Inflation, investment and economic performance: The role of internal financing," European Economic Review, Elsevier, vol. 49(5), pages 1283-1303, July.
    2. Ester Faia, 2007. "Financial Differences and Business Cycle Co‐Movements in a Currency Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 151-185, February.
    3. Jose L Wynne, 2001. "Financial Frictions in Business Cycles, Trade and Growth," Levine's Working Paper Archive 625018000000000127, David K. Levine.
    4. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
    5. Vega, Marco, 2015. "Monetary policy, financial dollarization and agency costs," Working Papers 2015-019, Banco Central de Reserva del Perú.
    6. Miquel Faig & Sonia Laszlo, 2000. "Liquidity Effects With Long Lived Production Projects," Working Papers faig-00-02, University of Toronto, Department of Economics.
    7. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Monetary shocks, agency costs, and business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 1-27, June.
    8. Johann Scharler, 2007. "The Liquidity Effect in Bank-Based and Market-Based Financial Systems," Economics working papers 2007-18, Department of Economics, Johannes Kepler University Linz, Austria.
    9. Scharler, Johann, 2008. "Bank lending and the stock market's response to monetary policy shocks," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 425-435.
    10. de Blas, Beatriz, 2009. "Performance of interest rate rules under credit market imperfections," Economic Modelling, Elsevier, vol. 26(3), pages 586-596, May.
    11. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
    12. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
    13. Hitoshi Inoue, 2010. "Capital Adequacy Requirements And The Financial Accelerator Caused By Bank Capital," The Japanese Economic Review, Japanese Economic Association, vol. 61(3), pages 382-407, September.
    14. Demirel, Ufuk Devrim, 2013. "Gains from commitment in monetary policy: Implications of the cost channel," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 218-226.
    15. Pedro Marcelo Oviedo, 2004. "Macroeconomic risk and banking crises in emerging market countries: business fluctuations with financial crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    16. Fachat, Christian, 2000. "Agency Costs, Net Worth, and the Transmission Mechanism of Monetary Policy," Bonn Econ Discussion Papers 2/2000, University of Bonn, Bonn Graduate School of Economics (BGSE).
    17. Schabert, Andreas, 2001. "Interest Rate Policy and the Price Puzzle in a Quantitative Business Cycle Model," Economics Series 95, Institute for Advanced Studies.
    18. Bruckner, Matthias & Schabert, Andreas, 2003. "Supply-side effects of monetary policy and equilibrium multiplicity," Economics Letters, Elsevier, vol. 79(2), pages 205-211, May.
    19. Johann Scharler, 2004. "Understanding the Stock Market’s Response to Monetary Policy Shocks," Working Papers 93, Oesterreichische Nationalbank (Austrian Central Bank).
    20. Fachat, Christian, 2000. "Agency Costs, Net Worth, and the Credit Channel of Monetary Transmission," Bonn Econ Discussion Papers 3/2000, University of Bonn, Bonn Graduate School of Economics (BGSE).
    21. Charles T. Carlstrom & Timothy S. Fuerst, 2002. "Imperfect capital markets and nominal wage rigidities," Working Papers (Old Series) 0205, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Financial intermediation · Business cycles · Liquidity effect.;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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