Moral hazard in financial markets Inefficient equilibria and monetary policies

Alessandro Fedele

No 2005019, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper presents a moral hazard model of financing in which borrowers adopt two modes of finance, either issuing bonds or applying for bank loans. The bond rate is set by the borrowers, while the loan rate is chosen by a monopolisticbank. Bank finance ameliorates the moral hazard problem by monitoring borrowers. Monetary interventions, which affect real economy through the bank lending channel, are justified on the basis of welfare considerations. When theinformational problem is not severe, monitoring is wasteful and welfare is enhanced through a monetary tightening. When the moral hazard problem is severe, monitoring is useful and welfare is increased by a monetary expansion.

Keywords: moral hazard; monitoring; monetary policies; bank lending channel (search for similar items in EconPapers)
JEL-codes: D82 E44 E52 (search for similar items in EconPapers)
Date: 2005-02
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Related works:
Journal Article: Moral Hazard in Financial Markets: Inefficient Equilibria and Monetary Policies (2006)
Working Paper: Moral hazard in financial markets: Inefficient equilibria and monetary policies (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2005019

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