Relative Pricing of Private and Public Debt: The Role of Money Creation Channel

61 Pages Posted: 31 Aug 2021

See all articles by Isha Agarwal

Isha Agarwal

University of British Columbia

Jan Bena

University of British Columbia - Sauder School of Business

Joyce Xuejing Guan

University of British Columbia - Sauder School of Business

Date Written: August 27, 2021

Abstract

We examine how the money creation function of banks affects the relative cost of firm financing in the bank loan vs public bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm with the same maturity and at the same time, we show that the loan-bond spread is lower for firms impacted by information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and argue that it is consistent with the “money creation” hypothesis in the theory of financial intermediation according to which banks need to keep information about their assets secret to produce private money.

Suggested Citation

Agarwal, Isha and Bena, Jan and Guan, Joyce Xuejing, Relative Pricing of Private and Public Debt: The Role of Money Creation Channel (August 27, 2021). Available at SSRN: https://ssrn.com/abstract=3912634 or http://dx.doi.org/10.2139/ssrn.3912634

Isha Agarwal (Contact Author)

University of British Columbia ( email )

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Jan Bena

University of British Columbia - Sauder School of Business ( email )

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HOME PAGE: http://www.janbena.com

Joyce Xuejing Guan

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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