Monetary Policy, Agency Costs and Output Dynamics

Posted: 31 Dec 2003

See all articles by Ludger Linnemann

Ludger Linnemann

University of Cologne - Department of Economics

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Abstract

This paper examines the role of financial market imperfections for output reactions to nominal interest rate shocks. Empirical evidence shows a hump-shaped impulse response function of output and suggests that credit supply co-moves with output. A monetary business cycle model with staggered price setting is presented where the firms' outlays for capital and labor must be covered by the sum of net worth of entrepreneurs and loans in the form of debt contracts. These properties are shown to generate a hump-shaped impulse response of output, which takes on the smooth and persistent appearance of the empirical output response when nominal wages are set in a staggered way, too.

Suggested Citation

Linnemann, Ludger and Schabert, Andreas, Monetary Policy, Agency Costs and Output Dynamics. German Economic Review, Vol. 4, pp. 341-364, August 2003. Available at SSRN: https://ssrn.com/abstract=424742

Ludger Linnemann (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany
+49-221-470-2999 (Phone)
+49-221-470-5077 (Fax)

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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