Asymmetric Information, Financial Intermediation, and Business Cycles

Posted: 3 Nov 1998

See all articles by Thomas F. Cooley

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Kwanghee Nam

Korea Economic Research Institute

Abstract

This paper incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy.

JEL Classification: E13, E5

Suggested Citation

Cooley, Thomas F. and Nam, Kwanghee, Asymmetric Information, Financial Intermediation, and Business Cycles. Economic Theory, Vol. 12, Iss. 3, October 13, 1998. Available at SSRN: https://ssrn.com/abstract=137417

Thomas F. Cooley (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER)

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Kwanghee Nam

Korea Economic Research Institute ( email )

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Korea

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