Corporate Finance and the Monetary Transmission Mechanism
Bolton, Patrick; Freixas Dargallo, Xavier
The Review of Financial Studies
We analyze the transmission effects of monetary policy in a general equilibrium model of the financial sector, with bank lending and securities markets. Bank lending is constrained by capital adequacy requirements, and asymmetric information adds a cost to outside bank equity capital. In our model, monetary policy does not affect bank lending through changes in bank liquidity; rather, it operates through changes in the spread of bank loans over corporate bonds, which induce changes in the aggregate composition of financing by firms, and in banks¿ equity-capital base. The model produces multiple equilibria, one of which displays all the features of a ¿credit crunch.¿
Bolton, Patrick; Freixas Dargallo, Xavier. Corporate Finance and the Monetary Transmission Mechanism. The Review of Financial Studies 2006; 19(3): 829-870.
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Index Scimago: 7.346 (2006)