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Lending Relationships and Optimal Monetary Policy, Working Paper 20-13

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Lending Relationships and Optimal Monetary Policy, Working Paper 20-13

DATE: September 2020

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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.

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Bethune, Zachary Austin , Rocheteau, Guillaume , Wong, Tsz-Nga and Zhang, Cathy M. "Lending Relationships and Optimal Monetary Policy, Working Paper 20-13," Working Papers (Federal Reserve Bank of Richmond) (September 2020). https://fraser.stlouisfed.org/title/3942/item/597837, accessed on November 29, 2023.

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EDITION: Revised

DIGITAL COPY SOURCE: Federal Reserve Bank of Richmond

SUBJECTS: THEMES: CLASSIFICATION:
  • jel: D83
  • jel: E32
  • jel: E51
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