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Entrepreneurial finance, home equity, and monetary policy

Paul Jackson and Florian Madison ()

No 322, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We model entrepreneurial finance using a combination of fiat money, credit cards, traditional bank loans, and home equity loans. The banking sector is over- the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The strength of this channel depends on the combination of nominal and real assets used to finance investments, and declines in the extent to which housing is accepted as collateral. Optimal investment occurs for a range of positive nominal interest rates due to strategic motives of holding at money. An extension shows that said motives vanish with access to competitive financial markets, rendering only the Friedman rule optimal. To address inefficiencies in a high interest rate environment, unconventional policy introducing partially liquid bonds relaxes entrepreneurs' liquidity constraints and restores efficiency.

Keywords: Entrepreneurial finance; money; housing; collateral; monetary policy (search for similar items in EconPapers)
JEL-codes: E22 E40 E52 G31 R31 (search for similar items in EconPapers)
Date: 2019-04, Revised 2020-06
New Economics Papers: this item is included in nep-ban, nep-mac, nep-mon and nep-ure
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Handle: RePEc:zur:econwp:322