Abstract

http://ssrn.com/abstract=278577
 
 

Citations (37)



 
 

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Corporate Finance and the Monetary Transmission Mechanism


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Xavier Freixas


Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

July 2001

CEPR Discussion Paper No. 2892

Abstract:     
This Paper analyses the transmission mechanisms of monetary policy in a general equilibrium model of securities markets and banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks' net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetary policy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing the aggregate composition of financing by firms. The model also produces multiple equilibria, one of which displays all the features of a 'credit crunch'. Thus, monetary policy can also have large effects when it induces a shift between equilibria.

Number of Pages in PDF File: 53

Keywords: Monetary policy, monetary policy, corporate finance, equity capital adequacy constraints

JEL Classification: E51, G30

working papers series


Date posted: August 1, 2001  

Suggested Citation

Bolton, Patrick and Freixas, Xavier, Corporate Finance and the Monetary Transmission Mechanism (July 2001). CEPR Discussion Paper No. 2892. Available at SSRN: http://ssrn.com/abstract=278577

Contact Information

Patrick Bolton (Contact Author)
Columbia Business School - Department of Economics ( email )
3022 Broadway
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Xavier Freixas
Universitat Pompeu Fabra ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)
HOME PAGE: http://www.econ.upf.es/~freixas
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm
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