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Monetary transmission under competing corporate finance regimes

Paul De Grauwe and Eddie Gerba ()
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Paul De Grauwe: London School of Economics and Political Science, London WC2A 2AE, United Kingdom
Eddie Gerba: Financial Stability Department, Bank of Spain, 28014 Madrid, Spain

Revista ESPE - Ensayos sobre Política Económica, 2017, vol. 35, issue 82, 78-100

Abstract: The behavioral agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of corporate finance arrangements for monetary transmission. Two alternative firm financial frictions are independently introduced: market-based and bank-based. We find convincing evidence that the overall monetary transmission channel is stronger in the bank-based system compared to the market-based. While the growth in credit is larger in the market-based system, uncertainty originated from imperfect beliefs produce impulse responses in macroeconomic variables that are, on average, half of those in the bank-based model. At the same time we find mixed results on the conditional effectiveness of monetary policy to offset contractions. Conditional on being in a recession, a monetary expansion in a market-based system creates higher successive booms. That said, a monetary easing in the bank-based system is more effective in smoothening the financial-and business cycles.

Keywords: Transmisiones monetarias; Bancos; Finanzas corporativas; Ciclo económico (search for similar items in EconPapers)
JEL-codes: E52 E44 E03 G21 G32 E32 G12 G35 (search for similar items in EconPapers)
Date: 2017
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