Entrepreneurial Finance, Home Equity, and Monetary Policy

University of Zurich, Department of Economics, Working Paper No. 322, Revised version

46 Pages Posted: 14 May 2019 Last revised: 11 Jun 2020

See all articles by Paul Jackson

Paul Jackson

University of California, Irvine

Florian Madison

Claremont McKenna College; University of Basel

Date Written: May 1, 2020


We model entrepreneurial finance using a combination of fiat money, credit cards, traditional bank loans, and home equity loans. The banking sector is over-the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The strength of this channel depends on the combination of nominal and real assets used to finance investments, and declines in the extent to which housing is accepted as collateral. Optimal investment occurs for a range of positive nominal interest rates due to strategic motives of holding fiat money. An extension shows that said motives vanish with access to competitive financial markets, rendering only the Friedman rule optimal. To address inefficiencies in a high interest rate environment, unconventional policy introducing partially
liquid bonds relaxes entrepreneurs' liquidity constraints and restores efficiency.

Keywords: Entrepreneurial finance, money, housing, collateral, monetary policy

JEL Classification: E22, E40, E52, G31, R31

Suggested Citation

Jackson, Paul and Madison, Florian, Entrepreneurial Finance, Home Equity, and Monetary Policy (May 1, 2020). University of Zurich, Department of Economics, Working Paper No. 322, Revised version, Available at SSRN: https://ssrn.com/abstract=3372407 or http://dx.doi.org/10.2139/ssrn.3372407

Paul Jackson (Contact Author)

University of California, Irvine ( email )

P.O. Box 19556
Science Library Serials
Irvine, CA 62697-3125
United States

Florian Madison

Claremont McKenna College ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

University of Basel ( email )

Petersplatz 1
Basel, CH-4003

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