Optimal Contracts, Aggregate Risk, and the Financial Accelerator

Charles Carlstrom, Timothy Fuerst and Matthias Paustian
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Matthias Paustian: https://www.federalreserve.gov/econres/matthias-o-paustian.htm

No 1420, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999), hereafter 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 with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.

Keywords: Agency costs; CGE models; optimal contracting (search for similar items in EconPapers)
JEL-codes: C68 E44 E61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-10-16
New Economics Papers: this item is included in nep-cmp, nep-cta, nep-dge and nep-mac
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https://doi.org/10.26509/frbc-wp-201420 Persistent link
https://www.clevelandfed.org/-/media/project/cleve ... -accelerator-pdf.pdf Full text (application/pdf)

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:fip:fedcwp:1420

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DOI: 10.26509/frbc-wp-201420

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