Bank Capital, Agency Costs, and Monetary Policy
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
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|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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9602, Federal Reserve Bank of Cleveland.
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