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Bank Capital, Agency Costs, and Monetary Policy

Author

Listed:
  • Césaire Meh
  • Kevin Moran

Abstract

Evidence suggests that banks, like firms, face financial frictions when raising funds. The authors develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms and the relationship between banks and their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment, and are important determinants of the propagation of shocks. The authors find that the effects of monetary policy and technology shocks are dampened but more persistent in their model than in an economy where the information friction that banks face is reduced or eliminated. After documenting that the bank capital-asset ratio is countercyclical in the data, the authors show that their model, in which movements in this ratio are market-determined, can replicate the countercyclical ratio.

Suggested Citation

  • Césaire Meh & Kevin Moran, 2004. "Bank Capital, Agency Costs, and Monetary Policy," Staff Working Papers 04-6, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-6
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    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
    2. 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, vol. 87(5), pages 893-910, December.
    3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    4. Berger, Allen N, 2003. " The Economic Effects of Technological Progress: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 141-176, April.
    5. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
    6. Ben S. Bernanke & Mark L. Gertler, 1985. "Banking in General Equilibrium," NBER Working Papers 1647, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Xu, T.T., 2012. "The role of credit in international business cycles," Cambridge Working Papers in Economics 1202, Faculty of Economics, University of Cambridge.
    2. Gregory deWalque & Olivier Pierrard & Abdelaziz Rouabah, 2010. "Financial (In)Stability, Supervision and Liquidity Injections: A Dynamic General Equilibrium Approach," Economic Journal, Royal Economic Society, vol. 120(549), pages 1234-1261, December.
    3. Pesaran, M. H. & Xu, T., 2011. "Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults," Cambridge Working Papers in Economics 1159, Faculty of Economics, University of Cambridge.
    4. Jorge, José, 2009. "Why do bank loans react with a delay to shifts in interest rates? A bank capital explanation," Economic Modelling, Elsevier, vol. 26(5), pages 799-806, September.
    5. Alvaro Aguiar & Inês Drumond, 2007. "Monetary Policy Amplification Effects through a Bank Capital Channel," Money Macro and Finance (MMF) Research Group Conference 2006 47, Money Macro and Finance Research Group.
    6. Matteo Iacoviello, 2014. "Macroeconomics of housing," Chapters,in: The Global Financial Crisis and Housing, chapter 2, pages 21-39 Edward Elgar Publishing.
    7. Hirakata, Naohisa & Sudo, Nao & Ueda, Kozo, 2011. "Do banking shocks matter for the U.S. economy?," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2042-2063.
    8. Leung, Charles, 2004. "Macroeconomics and housing: a review of the literature," Journal of Housing Economics, Elsevier, vol. 13(4), pages 249-267, December.
    9. repec:bla:ecinqu:v:55:y:2017:i:1:p:565-579 is not listed on IDEAS
    10. Atta-Mensah, Joseph & Dib, Ali, 2008. "Bank lending, credit shocks, and the transmission of Canadian monetary policy," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 159-176.
    11. Martin Berka & Christian Zimmermann, 2011. "Basel Accord and financial intermediation: the impact of policy," Working Papers 2011-042, Federal Reserve Bank of St. Louis.
    12. den Haan, Wouter J. & Sumner, Steven W. & Yamashiro, Guy M., 2007. "Bank loan portfolios and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 904-924, April.
    13. Bojan Markovic, 2006. "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England.
    14. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2017. "Chained Credit Contracts And Financial Accelerators," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 565-579, January.
    15. repec:spr:jecfin:v:41:y:2017:i:2:d:10.1007_s12197-016-9359-5 is not listed on IDEAS
    16. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.
    17. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
    18. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    19. Ali Dib & Ian Christensen, 2005. "Monetary Policy in an Estimated DSGE Model with a Financial Accelerator," Computing in Economics and Finance 2005 314, Society for Computational Economics.
    20. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
    21. Fabian Valencia, 2008. "Banks’ Precautionary Capital and Persistent Credit Crunches," IMF Working Papers 08/248, International Monetary Fund.
    22. repec:eee:revfin:v:33:y:2017:i:c:p:55-63 is not listed on IDEAS

    More about this item

    Keywords

    Business fluctuations and cycles; Financial institutions; Transmission of monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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