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Asymmetric information, financial intermediation, and business cycles

  • Kwanghee Nam

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

  • Thomas F. Cooley


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

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.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 12 (1998)
Issue (Month): 3 ()
Pages: 599-620

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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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