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  4. January 2016
  5. Optimal Contracts, Aggregate Risk, and the Financial Accelerator

Optimal Contracts, Aggregate Risk, and the Financial Accelerator

  • Charles T. Carlstrom
  • Timothy S. Fuerst
  • Matthias Paustian
American Economic Journal: Macroeconomics
vol. 8, no. 1, January 2016
(pp. 119-47)
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Abstract

This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler, and Gilchrist (1999), henceforth, BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator. (JEL D11, D81, D86, D92, E13, G31, L26)

Citation

Carlstrom, Charles T., Timothy S. Fuerst, and Matthias Paustian. 2016. "Optimal Contracts, Aggregate Risk, and the Financial Accelerator." American Economic Journal: Macroeconomics, 8 (1): 119-47. DOI: 10.1257/mac.20120024

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • D86 Economics of Contract: Theory
  • D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
  • E13 General Aggregative Models: Neoclassical
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • L26 Entrepreneurship
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