Download This PaperOptimal Contracts, Aggregate Risk and the Financial Accelerator
32 Pages Posted: 29 Nov 2014
Date Written: November 28, 2014
Abstract
This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (BGG). The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared to the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
Keywords: Financial accelerator, optimal contracts, aggregate risk
JEL Classification: E32, C32
Suggested Citation: Suggested Citation
Fuerst, Timothy S. and Carlstrom, Charles T. and Paustian, Matthias, Optimal Contracts, Aggregate Risk and the Financial Accelerator (November 28, 2014). Bank of England Working Paper No. 517, Available at SSRN: https://ssrn.com/abstract=2531681 or http://dx.doi.org/10.2139/ssrn.2531681
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