Optimal contracts, aggregate risk and the financial accelerator

Timothy Fuerst, Charles Carlstrom and Matthias Paustian ()
Additional contact information
Matthias Paustian: Federal Reserve Board

No 517, Bank of England working papers from Bank of England

Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (BGG). The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared to the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.

Keywords: financial accelerator; optimal contracts; aggregate risk (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-11-28
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Optimal Contracts, Aggregate Risk, and the Financial Accelerator (2016)
Working Paper: Optimal Contracts, Aggregate Risk, and the Financial Accelerator (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0517

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