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The Financial Accelerator and the Optimal Lending Contract

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  • Mikhail Dmitriev
  • Jonathan Hoddenbagh

Abstract

In the financial accelerator literature pioneered by Bernanke, Gertler and Gilchrist (1999) entrepreneurs are myopic and lenders suboptimally choose a safe rate of return on their loans. We derive the optimal lending contract for forward looking entrepreneurs and provide three main results. First, under the optimal contract we find that financial frictions do not amplify business cycle fluctuations. Second, we show that shocks to the variance of unobserved idiosyncratic productivity --- so-called ``risk shocks'' --- have little effect on the real economy under the optimal contract. Third, we find that amplification under the suboptimal contract depends on loose monetary policy: when interest rate setting follows a standard Taylor rule, the financial accelerator is significantly dampened or even reversed.

Suggested Citation

  • Mikhail Dmitriev & Jonathan Hoddenbagh, 2013. "The Financial Accelerator and the Optimal Lending Contract," 2013 Papers pdm9, Job Market Papers.
  • Handle: RePEc:jmp:jm2013:pdm9
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    References listed on IDEAS

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    Cited by:

    1. Ozhan, Galip Kemal, 2020. "Financial intermediation, resource allocation, and macroeconomic interdependence," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 265-278.
    2. Giacomo Candian & Mikhail Dmitriev, 2019. "Implications of Default Recovery Rates for Aggregate Fluctuations," 2019 Meeting Papers 1185, Society for Economic Dynamics.
    3. Galip Kemal Ozhan, 2015. "Financial Intermediation, Resource Allocation, and Macroeconomic Interdependence," 2015 Papers poz71, Job Market Papers.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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