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Fiscal, Monetary, and Financial Interactions in Dynamic General Equilibrium

Holger Strulik ()

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: This paper proposes a model that links households and firms, as usual, by markets for factors and goods and, additionally, by a banking sector that channels households' funds to firms and eliminates idiosyncratic risk. In equilibrium, agency costs and tax benefits of corporate debt are equalizing each other, which renders an institutionally based explanation of financial structure. Adjustment of corporate finance adds to the ordinary savings channel of fiscal and monetary policy. Taking real and financial interactions into account, the model predicts a somewhat lower impact of fiscal policy on macroeconomic aggregates as commonly assessed and a much stronger impact of monetary policy. This amplification is caused by the banking sector's translation of borrowing rates into lending rates and vice versa.

Keywords: Fiscal Policy; Monetary Policy; Corporate Finance; Agency Costs; Banking; Economic Growth; Business Cycles. (search for similar items in EconPapers)
JEL-codes: E44 E52 E62 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-mac
Date: 2008-06
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