CREDIT MARKET FRICTIONS IN AN OPEN ECONOMY

Iris Claus () and Kunhong Kim

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper assesses the effects of asymmetric information and agency costs in credit markets in an open economy with a floating exchange rate and sticky prices. A decline in agency costs lowers the cost of external finance and increases the long-run level of steady state investment, capital and output. Agency costs also affect the business cycle and the central bank’s response to shocks in the economy. Following a supply (demand) shock to the economy agency costs dampen (magnify) output fluctuations. The results thus underline the importance of incorporating credit markets into macroeconomic models.

JEL-codes: E32 E44 E50 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2006-01
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2006-04

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