Firm entry and monetary policy transmission under credit rationing

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents an additional credit channel for monetary policy that would arise in the presence of credit rationing. I formally examine a situation in which new entry firms have no choice but to borrow funds from a financial intermediary to cover entry costs, taking into account the fact that most of the small and young firms are bank dependent in practice. It turns out that the presence of nominal debt contracts allows the central bank to influence firm entry and thereby aggregate output through its effect on the severity of credit rationing even in the absence of price stickiness. This is because a decrease in the nominal interest rate reduces the cost of funds for lending, which enables financial intermediaries to extend credit to less creditworthy firms. This ``credit rationing effect" is absent in the conventional balance-sheet channel, where loan rates are determined such that credit demand is equal to credit supply.

Keywords: credit channel; credit rationing; firm entry; monetary policy transmission. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2009-09-28
New Economics Papers: this item is included in nep-cba, nep-ent, nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/25635/1/MPRA_paper_25635.pdf revised version (application/pdf)

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