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Agency Costs and Investment Behavior

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  • Dorofeenko, Viktor

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Lee, Gabriel S.

    (Department of Real Estate, University of Regensburg and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Salyer, Kevin D.

    (Department of Economics, University of California)

Abstract

How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S.

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File URL: http://www.ihs.ac.at/publications/eco/es-182.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 182.

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Length: 37 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:ihs:ihsesp:182

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Keywords: Agency costs; Credit channel; Investment behavior; E.U. Area;

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  1. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  2. Kevin D. Salyer & Gabriel Lee, 2002. "Time Varying Uncertainty and the Credit Channel," Computing in Economics and Finance 2002 137, Society for Computational Economics.
  3. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  4. Harold L. Cole & Lee E. Ohanian, 2000. "Re-examining the contributions of money and banking shocks to the U.S. Great Depression," Staff Report 270, Federal Reserve Bank of Minneapolis.
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  6. 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, vol. 31(2), pages 187-211, May.
  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.
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  14. Cordoba, Juan & Ripoll, Marla, 2002. "Credit Cycles Redux," Working Papers 2002-07, Rice University, Department of Economics.
    • Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November.
  15. Kevin D. Hoover & Kevin D. Salyer, . "Technology Shocks Or Colored Noise? Why Real-Business-Cycle Models Cannot Explain Actual Business Cycles," Department of Economics 97-29, California Davis - Department of Economics.
  16. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  17. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  18. Ignazio Angeloni & Anil K. Kashyap & Benoit Mojon & Daniele Terlizzese, 2003. "Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All?," NBER Working Papers 9984, National Bureau of Economic Research, Inc.
  19. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
  20. 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.
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