Bank Capital, Agency Costs, and Monetary Policy

No 318, 2004 Meeting Papers from Society for Economic Dynamics

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

Keywords: cyclical properties of bank capital; agency costs; monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Bank Capital, Agency Costs, and Monetary Policy (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:318

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