Corporate Finance and the Monetary Transmission Mechanism

Patrick Bolton and Xavier Freixas ()

The Review of Financial Studies, 2006, vol. 19, issue 3, 829-870

Abstract: 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." Copyright 2006, Oxford University Press.

Date: 2006
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Working Paper: Corporate Finance and the Monetary Transmission Mechanism (2001)
Working Paper: Corporate finance and the monetary transmission mechanism (2000)
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