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The role of corporate balance sheets and bank lending policies in a financial accelerator framework

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  • Simon Hall
  • Anne Vila Wetherilt
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    Abstract

    In this paper the popular Bernanke, Gertler and Gilchrist (BGG) model is used to explore links between the financial health of the non-financial corporate sector and bank lending behaviour on the one hand, and the effectiveness of monetary policy on the other. The model's microeconomic contracting framework is used to generate specific financial scenarios, defined in terms of steady-state credit spreads, bank lending policies and corporate sector financial health. These scenarios are embedded in the macroeconomic BGG model, and an investigation carried out into how they affect dynamic responses of the real economy to monetary and real shocks. The simulations show that in the context of the BGG model, the balance sheet positions of the financial and non-financial corporate sectors can affect the monetary transmission mechanism. It is illustrated that in certain financial scenarios in the model the financial accelerator mechanism is very potent, whereas in others it has little incremental impact. This implies that, for a given shock, monetary policy can be less or more proactive, respectively. In addition, the model simulation results suggest that certain parameters may merit particular attention. For example, the sensitivity of bank lending policy to news about corporate financial health has an especially marked impact in the model's dynamics. And as illustrated in previous work, corporate leverage also plays an important role in amplifying and propagating shocks.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2002/wp166.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 166.

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    Date of creation: Sep 2002
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    Handle: RePEc:boe:boeewp:166

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    1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    5. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
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    7. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    8. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
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    Cited by:
    1. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
    2. Cavalcanti, Marco Antonio F.H., 2010. "Credit market imperfections and the power of the financial accelerator: A theoretical and empirical investigation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 118-144, March.

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