Working Paper: CEPR ID: DP2060
Authors: Rafael Repullo; Javier Suarez
Abstract: This paper develops a model of the choice between bank and market finance by entrepreneurial firms that differ in the value of their net worth. The monitoring associated with bank finance ameliorates a moral hazard problem between the entrepreneurs and their lenders. The model is used to analyze the different strands of the credit view of the transmission of monetary policy. In particular, we derive the empirical implications of a broad credit channel, and compare them to those obtained when the model is extended to incorporate some elements of the bank lending channel.
Keywords: monetary transmission mechanism; credit markets; bank monitoring; interest rate ceilings; capital requirements
JEL Codes: D82; E44; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank monitoring (G21) | Reduced moral hazard (G52) |
| Reliance on external finance (G32) | Increased moral hazard (G52) |
| Monetary policy changes (E52) | Decrease in aggregate investment (E22) |
| Monetary policy changes (E52) | Shift towards higher net worth borrowers in credit allocation (G51) |