The Financial Accelerator and the Optimal State-Dependent Contract

Jonathan Hoddenbagh and Mikhail Dmitriev

Review of Economic Dynamics, 2017, vol. 24, 43-65

Abstract: In the financial accelerator literature pioneered by Bernanke, Gertler and Gilchrist (1999) entrepreneurs are myopic and risk-neutral, and loans have a predetermined rate of return by assumption. We relax these assumptions and derive the optimal state-dependent loan contract for forward-looking risk-averse entrepreneurs. We show that financial frictions deliver less amplification under the optimal state-dependent contract. (Copyright: Elsevier)

Keywords: Financial accelerator; Financial frictions; Risk; Optimal contract; Agency costs (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (20)

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DOI: 10.1016/j.red.2016.12.003

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