Lending Relationships and Optimal Monetary Policy

Zachary Bethune; Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang

doi:10.1093/restud/rdab077

Review of Economic Studies Vol. 89 No. 4 2022

Lending Relationships and Optimal Monetary Policy

Zachary Bethune¹; Guillaume Rocheteau²; Tsz-Nga Wong³; Cathy Zhang⁴

¹ University of Virginia · ² University of California, Irvine LEMMA, University of Paris II · ³ Federal Reserve Bank of Richmond · ⁴ Purdue University

Abstract

We construct and calibrate a monetary model of corporate finance with endogenous formation of lending relationships. The equilibrium features money demands by firms that depend on their access to credit and a pecking order of financing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms’ incentives to use internal or external finance. We study optimal monetary policy following an unanticipated destruction of relationships under different commitment assumptions. The Ramsey solution uses forward guidance to expedite creation of new relationships by committing to raise the user cost of cash gradually above its long-run value. Absent commitment, the user cost is kept low, delaying recovery.

DOI: 10.1093/restud/rdab077
Volume: 89
Issue: 4
Pages: 1833-1872
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Lending Relationships and Optimal Monetary Policy

Abstract

Cite