Agency Costs and Investment Behavior
AbstractHow 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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Bibliographic InfoPaper provided by Institute for Advanced Studies in its series Economics Series with number 182.
Length: 37 pages
Date of creation: Dec 2005
Date of revision:
Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-20 (All new papers)
- NEP-DGE-2005-12-20 (Dynamic General Equilibrium)
- NEP-EEC-2005-12-20 (European Economics)
- NEP-FMK-2005-12-20 (Financial Markets)
- NEP-MAC-2005-12-20 (Macroeconomics)
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