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  3. American Economic Review
  4. April 2018
  5. Corporate Finance and Monetary Policy

Corporate Finance and Monetary Policy

  • Guillaume Rocheteau
  • Randall Wright
  • Cathy Zhang
American Economic Review
vol. 108, no. 4-5, April 2018
(pp. 1147-86)
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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.

Citation

Rocheteau, Guillaume, Randall Wright, and Cathy Zhang. 2018. "Corporate Finance and Monetary Policy." American Economic Review, 108 (4-5): 1147-86. DOI: 10.1257/aer.20161048

Additional Materials

JEL Classification

  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • L26 Entrepreneurship