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American Economic Review Vol. 108 No. 4-5 2018

Corporate Finance and Monetary Policy

Guillaume Rocheteau1; Randall Wright2; Cathy Zhang3

1 University of California-Irvine, 3151 Social Science Plaza, Irvine, CA 92697, and LEMMA, Université Panthéon-Assas (email: ) · 2 University of Wisconsin-Madison, 975 University Avenue, Madison, WI 53706, Federal Reserve Bank Chicago, and Federal Reserve Bank Minneapolis (email: ) · 3 Purdue University, 403 W. State Street, West Lafayette, IN 47907 (email: )

Abstract

We develop a general equilibrium model where entrepreneurs finance random investment opportunities using trade credit, bank-issued assets, or currency. They search for bank funding in over-the-counter markets where loan sizes, interest rates, and down payments are negotiated bilaterally. The theory generates pass-through from nominal interest rates to real lending rates depending on market microstructure, policy, and firm characteristics. Higher banks' bargaining power, for example, raises pass-through but weakens transmission to investment. Interest rate spreads arise from liquidity, regulatory, and intermediation premia and depend on policy described as money growth or open market operations.

DOI
10.1257/aer.20161048
Volume
108
Issue
4-5
Pages
1147-1186
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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