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Asymmetric information, financial intermediation, and business cycles

Author

Listed:
  • Kwanghee Nam

    (Korea Economic Research Institute, Seoul 120-090, KOREA)

  • Thomas F. Cooley

    () (Simon School of Business, University of Rochester, Rochester, NY 14627, USA)

Abstract

This incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy.

Suggested Citation

  • Kwanghee Nam & Thomas F. Cooley, 1998. "Asymmetric information, financial intermediation, and business cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 599-620.
  • Handle: RePEc:spr:joecth:v:12:y:1998:i:3:p:599-620 Note: Received: March 20, 1998; revised version: 1 April 1998
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    Cited by:

    1. de Blas, Beatriz, 2009. "Performance of interest rate rules under credit market imperfections," Economic Modelling, Elsevier, pages 586-596.
    2. Smith, R. Todd & van Egteren, Henry, 2005. "Inflation, investment and economic performance: The role of internal financing," European Economic Review, Elsevier, vol. 49(5), pages 1283-1303, July.
    3. Scharler, Johann, 2008. "Bank lending and the stock market's response to monetary policy shocks," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 425-435.
    4. Johann Scharler, 2004. "Understanding the Stock Market’s Response to Monetary Policy Shocks," Working Papers 93, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Ester Faia, 2007. "Financial Differences and Business Cycle Co-Movements in a Currency Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 151-185, February.
    6. Jose L Wynne, 2001. "Financial Frictions in Business Cycles, Trade and Growth," Levine's Working Paper Archive 625018000000000127, David K. Levine.
    7. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
    8. Christian Fachat, 2000. "Agency Costs, Net Worth, and the Credit Channel of Monetary Transmission," Bonn Econ Discussion Papers bgse3_2000, University of Bonn, Germany.
    9. Charles T. Carlstrom & Timothy S. Fuerst, 2002. "Imperfect capital markets and nominal wage rigidities," Working Paper 0205, Federal Reserve Bank of Cleveland.
    10. Vega, Marco, 2015. "Monetary policy, financial dollarization and agency costs," Working Papers 2015-019, Banco Central de Reserva del Perú.
    11. C. K. Folkertsma, 2000. "Liquidity effects and the welfare costs of inflation in an endogenous growth model," WO Research Memoranda (discontinued) 607, Netherlands Central Bank, Research Department.
    12. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
    13. Miquel Faig & Sonia Laszlo, 2000. "Liquidity Effects With Long Lived Production Projects," Working Papers faig-00-02, University of Toronto, Department of Economics.
    14. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Monetary shocks, agency costs, and business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 1-27.
    15. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
    16. Schabert, Andreas, 2001. "Interest Rate Policy and the Price Puzzle in a Quantitative Business Cycle Model," Economics Series 95, Institute for Advanced Studies.
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    19. Demirel, Ufuk Devrim, 2013. "Gains from commitment in monetary policy: Implications of the cost channel," Journal of Macroeconomics, Elsevier, pages 218-226.
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    More about this item

    Keywords

    Financial intermediation · Business cycles · Liquidity effect.;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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