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Agency Costs, Net Worth, and the Credit Channel of Monetary Transmission

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  • Christian Fachat
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    Abstract

    This paper presents a full model of the Credit Channel of the monetary transmission mechanism. In particular, the special role of the banking sector is derived endogenously and special attention is paid to the role of borrowers' net worth. A debt contracting problem with asymmetric information and heterogeneous borrowers is embedded in a stochastic dynamic general equilibrium model with money. In contrast to the traditional assumption, the paper assumes that agency costs arise in the production of aggregate output instead of in the investment sector. Numerical simulations of the model economy show two major points: First, the model with heterogeneous borrowers does not replicate as many stylized facts as the model without heterogeneous borrowers. Second, the model dampens the impulse response of output after a positive money supply shock, compared to the standard monetary business cycle model. Interestingly, the results of this paper differ considerably from the results o! f a related paper with agency costs arising in the production of the investment good.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse3_2000.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse3_2000.

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    Date of creation: Mar 2000
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    Handle: RePEc:bon:bonedp:bgse3_2000

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

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    Keywords: financial intermediation; costly state verification; monetary transmission mechanism; credit channel; limited participation; liquidity effect;

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