Optimal Contracts, Aggregate Risk, and the Financial Accelerator

Charles Carlstrom, Timothy Fuerst and Matthias Paustian

American Economic Journal: Macroeconomics, 2016, vol. 8, issue 1, 119-47

Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler, and Gilchrist (1999), henceforth, BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator. (JEL D11, D81, D86, D92, E13, G31, L26)

JEL-codes: D11 D81 D86 D92 E13 G31 L26 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/mac.20120024
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Related works:
Working Paper: Optimal contracts, aggregate risk and the financial accelerator (2014)
Working Paper: Optimal Contracts, Aggregate Risk, and the Financial Accelerator (2014)
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