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Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy

Ingo Fender

No 94, BIS Working Papers from Bank for International Settlements

Abstract: This complementary paper to Froot, Scharfstein, and Stein (1993) seeks to explore some of the corporate finance foundations of monetary economics. In particular, we investigate the impact of corporate risk management strategies on the monetary transmission mechanism. We employ a simple model of a financial accelerator (synonymously: a broad credit channel of monetary policy transmission) to argue that information asymmetries - which are at the heart of these models of the transmission mechanism - create incentives for corporate hedging programmes, that is, cash flow management. These policies, in turn, diminish the impact of monetary policy measures, which is reduced to the pure cost-of-capital effect.

JEL-codes: E44 E52 G31 G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2000-11
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