Corporate Finance and the Monetary Transmission Mechanism

Posted: 29 Feb 2008

See all articles by Xavier Freixas

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: 2006

Abstract

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."

Suggested Citation

Freixas, Xavier, Corporate Finance and the Monetary Transmission Mechanism ( 2006). The Review of Financial Studies, Vol. 19, Issue 3, pp. 829-870, 2006. Available at SSRN: https://ssrn.com/abstract=1096006 or http://dx.doi.org/10.1093/rfs/hhl002

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 )

London
United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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