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Entrepreneurial finance, home equity, and monetary policy

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  • Paul Jackson
  • Florian Madison

Abstract

We model entrepreneurial finance using a combination of fiat money, credit cards, traditional bank loans, and home equity loans. The banking sector is over- the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The strength of this channel depends on the combination of nominal and real assets used to finance investments, and declines in the extent to which housing is accepted as collateral. Optimal investment occurs for a range of positive nominal interest rates due to strategic motives of holding at money. An extension shows that said motives vanish with access to competitive financial markets, rendering only the Friedman rule optimal. To address inefficiencies in a high interest rate environment, unconventional policy introducing partially liquid bonds relaxes entrepreneurs' liquidity constraints and restores efficiency. File-URL: https://www.e-helvetica.nb.admin.ch/api/download/urn%3Anbn%3Ach%3Abel-5445719%3Aeconwp322.pdf File-Format: application/pdf

Suggested Citation

  • Paul Jackson & Florian Madison, 2019. "Entrepreneurial finance, home equity, and monetary policy," ECON - Working Papers 322, Department of Economics - University of Zurich, revised Jun 2020.
    • Handle: RePEc:zur:econwp:322
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    References listed on IDEAS

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    1. Jensen, Thais Laerkholm & Leth-Petersen, Søren & Nanda, Ramana, 2022. "Financing constraints, home equity and selection into entrepreneurship," Journal of Financial Economics, Elsevier, vol. 145(2), pages 318-337.
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    More about this item

    Keywords

    Entrepreneurial finance; money; housing; collateral; monetary policy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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