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Monetary shocks, agency costs, and business cycles

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  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper’s chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0011.

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Date of creation: 2000
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Handle: RePEc:fip:fedcwp:0011

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Keywords: Business cycles ; Monetary policy;

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  1. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(1), pages 45-69, September.
  2. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers, UCLA Department of Economics 496, UCLA Department of Economics.
  3. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, Springer, vol. 27(1), pages 243-270, 01.
  4. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1321-1353.
  5. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 572, Queen's University, Department of Economics.
  6. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 559-596.
  7. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  8. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
  9. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 247-267, November.
  10. Fisher, Jonas D M, 1999. "Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(2), pages 187-211, May.
  11. 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, American Economic Association, vol. 87(5), pages 893-910, December.
  12. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 337-47, May.
  13. Kwanghee Nam & Thomas F. Cooley, 1998. "Asymmetric information, financial intermediation, and business cycles," Economic Theory, Springer, Springer, vol. 12(3), pages 599-620.
  14. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  15. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  16. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  17. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, Springer, vol. 12(3), pages 583-597.
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