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Bank Capital, Agency Costs, and Monetary Policy

  • Kevin Moran
  • Cesaire Meh

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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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 318.

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Date of creation: 2004
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Handle: RePEc:red:sed004:318
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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  1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
  2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  3. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  4. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  5. Berger, Allen N, 2003. " The Economic Effects of Technological Progress: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 141-76, April.
  6. Ben S. Bernanke & Mark L. Gertler, 1985. "Banking in General Equilibrium," NBER Working Papers 1647, National Bureau of Economic Research, Inc.
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