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Agency Costs, Net Worth, and the Transmission Mechanism of Monetary Policy

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  • Fachat, Christian

Abstract

A variety of empirical and theoretical evidence published in recent years suggests that frictions in credit markets are crucial to understand the monetary transmission mechanism. The objective of this paper is to provide a quantitative evaluation of the credit view interpretation of this evidence. Special attention is paid to the role of borrowers' net worth. A model with endogenous agency costs is developed where a debt contracting problem with asymmetric information between lender and borrower is embedded in a stochastic dynamic general equilibrium model with money. The model incorporates a cash-in-advance constraint and a limited participation assumption in order to induce a liquidity effect of monetary shocks and to propagate monetary disturbances. The paper has two principal conclusions: First, the model economy shows that a positive money supply shock generates an increase in output and in employment. Second, ex ante heterogeneity of borrowers has a significant influence on the reactions of the model economy to a monetary shock.

Suggested Citation

  • 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).
    • Handle: RePEc:zbw:bonedp:22000
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    1. 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).

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    More about this item

    Keywords

    financial intermediation; costly state verification; monetary transmission mechanism; credit channel; limited participation;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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