Corporate Finance and the Monetary Transmission Mechanism
We analyze the transmission effects of monetary policy in a general equilibrium model of the financial sector, with bank lending and securities markets. Bank lending is constrained by capital adequacy requirements, and asymmetric information adds a cost to outside bank equity capital. In our model, monetary policy does not affect bank lending through changes in bank liquidity; rather, it operates through changes in the spread of bank loans over corporate bonds, which induce changes in the aggregate composition of financing by firms, and in banks' equity-capital base. The model produces multiple equilibria, one of which displays all the features of a "credit crunch." Copyright 2006, Oxford University Press.
Year of publication: |
2006
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Authors: | Bolton, Patrick ; Freixas, Xavier |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 19.2006, 3, p. 829-870
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Publisher: |
Society for Financial Studies - SFS |
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