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Corporate Finance and the Monetary Transmission Mechanism


  • Bolton, Patrick
  • Freixas, Xavier


This Paper analyses the transmission mechanisms of monetary policy in a general equilibrium model of securities markets and banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks' net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetary policy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing the aggregate composition of financing by firms. The model also produces multiple equilibria, one of which displays all the features of a ‘credit crunch’. Thus, monetary policy can also have large effects when it induces a shift between equilibria.

Suggested Citation

  • Bolton, Patrick & Freixas, Xavier, 2001. "Corporate Finance and the Monetary Transmission Mechanism," CEPR Discussion Papers 2892, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2892

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    References listed on IDEAS

    1. Christopher M. Meissner, 2003. "Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era," American Economic Review, American Economic Association, vol. 93(1), pages 344-353, March.
    2. Martin Feldstein, 1997. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 23-42, Fall.
    3. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
    4. Andrew K. Rose, 2001. "Currency unions and trade: the effect is large," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 449-461, October.
    5. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
    6. Rodney Thom & Brendan M. Walsh, 2001. "The effect of a common currency on trade : Ireland before and after the Sterling link," Working Papers 200110, School of Economics, University College Dublin.
    7. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
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    More about this item


    corporate finance; equity capital adequacy constraints; monetary policy;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General


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