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Bank Capital, Agency Costs, and Monetary Policy

Author

Listed:
  • Kevin Moran
  • Cesaire Meh

Abstract

Evidence suggests that banks, like firms, face financial frictions when raising funds. In this paper, we develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms as well as that linking banks to their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment,and help propagate over time shocks affecting the economy. Our findings are as follows. First, we find that the effects of monetary policy and technology shocks are dampened but more persistent in our environment, relative to an economy where the information friction facing banks is reduced or eliminated. Second, after documenting that the bank capital-asset ratio is countercyclical in the data, we show that our model, in which movements in the bank capital-asset ratio are market-determined, replicates that feature

Suggested Citation

  • Kevin Moran & Cesaire Meh, 2004. "Bank Capital, Agency Costs, and Monetary Policy," 2004 Meeting Papers 318, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:318
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    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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