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Bank Capital, Agency Costs, and Monetary Policy

Cesaire Meh and Kevin Moran

Staff Working Papers from Bank of Canada

Abstract: Evidence suggests that banks, like firms, face financial frictions when raising funds. The authors develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms and the relationship between banks and their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment, and are important determinants of the propagation of shocks. The authors find that the effects of monetary policy and technology shocks are dampened but more persistent in their model than in an economy where the information friction that banks face is reduced or eliminated. After documenting that the bank capital-asset ratio is countercyclical in the data, the authors show that their model, in which movements in this ratio are market-determined, can replicate the countercyclical ratio.

Keywords: Business fluctuations and cycles; Financial institutions; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2004
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Working Paper: Bank Capital, Agency Costs, and Monetary Policy (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-6

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