Financial Intermediary Balance Sheet Management
We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm’s own dividend (or share price), a given increase in the firm’s output generated by an additional unit of physical investment results in a more than proportional increase in the manager’s income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in the manager’s expectations that are unrelated to the economy’s fundamentals. Arbitrarily large fluctuations in macroeconomic variables may result. We also provide a theoretical justification for the proposed family of contracts by demonstrating that they yield first-best outcomes for specific parameter choices.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: 33 Liberty Street, New York, NY 10045-0001|
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2008.
"Current account dynamics and monetary policy,"
Working Paper Series
2008-26, Federal Reserve Bank of San Francisco.
- Andrea Ferrero & Mark Gertler & Lars E.O. Svensson, 2008. "Current Account Dynamics and Monetary Policy," NBER Working Papers 13906, National Bureau of Economic Research, Inc.
- Mark Gertler & Lars Svensson & Andrea Ferrero, 2008. "Current Account Dynamics and Monetary Policy," 2008 Meeting Papers 359, Society for Economic Dynamics.
- Alejandro Justiniano & Bruce Preston, 2009.
"Monetary policy and uncertainty in an empirical small open economy model,"
Working Paper Series
WP-09-21, Federal Reserve Bank of Chicago.
- Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
- Benigno, Pierpaolo, 2001.
"Price Stability with Imperfect Financial Integration,"
CEPR Discussion Papers
2854, C.E.P.R. Discussion Papers.
- Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:531. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber)
If references are entirely missing, you can add them using this form.