Asymmetric information, financial intermediation, and business cycles

Kwanghee Nam and Thomas Cooley
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Kwanghee Nam: Korea Economic Research Institute, Seoul 120-090, KOREA

Economic Theory, 1998, vol. 12, issue 3, 599-620

Abstract: This incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy.

Keywords: Financial; intermediation; ·; Business; cycles; ·; Liquidity; effect. (search for similar items in EconPapers)
JEL-codes: E13 E5 (search for similar items in EconPapers)
Date: 1998-10-13
Note: Received: March 20, 1998; revised version: 1 April 1998
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Citations: View citations in EconPapers (24)

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