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Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy

  • Ingo Fender

This complementary paper to Froot, Scharfstein, and Stein (1993) seeks to explore some of the corporate finance foundations of monetary economics. In particular, we investigate the impact of corporate risk management strategies on the monetary transmission mechanism. We employ a simple model of a financial accelerator (synonymously: a broad credit channel of monetary policy transmission) to argue that information asymmetries - which are at the heart of these models of the transmission mechanism - create incentives for corporate hedging programmes, that is, cash flow management. These policies, in turn, diminish the impact of monetary policy measures, which is reduced to the pure cost-of-capital effect.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 94.

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Length: 36 pages
Date of creation: Nov 2000
Date of revision:
Handle: RePEc:bis:biswps:94
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  1. von Hagen, Jürgen & Fender, Ingo, 1998. "Central bank policy in a more perfect financial system," ZEI Working Papers B 03-1998, ZEI - Center for European Integration Studies, University of Bonn.
  2. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  3. Nikolaus A. Siegfried, 2000. "Monetary Transmission Mechanisms in Euroland," Quantitative Macroeconomics Working Papers 20003, Hamburg University, Department of Economics.
  4. Christina D. Romer & David Romer, 1993. "Credit channel or credit actions? an interpretation of the postwar transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 71-149.
  5. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  6. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
  7. Daniel L. Thornton, 1994. "Financial innovation, deregulation and the "credit view" of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-49.
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