Essays on Economic Policy (ESPE in Spanish) - Monetary Transmission Under Competing Corporate Finance Regimes

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En la revista Ensayos sobre Política Económica (ESPE) divulgamos los resultados y las propuestas de política que surgen de investigaciones académicas realizadas en el Banco de la República. Cuando nos lea, tenga siempre presente que el contenido de nuestros artículos, así como los análisis y conclusiones que de ellos se derivan, son exclusiva responsabilidad de sus autores. El material divulgado en nuestra revista ESPE no compromete ni representa la opinión del Banco de la República ni la de su Junta Directiva.

AUTHOR OR EDITOR
Paul De Grauwe
Eddie Gerba
AUTHORS AND/OR EDITORS
Publication Date:
Sunday, 30 April 2017

Abstract

The behavioral agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of corporate finance arrangements for monetary transmission. Two alternative firm financial frictions are independently introduced: market-based and bank-based. We find convincing evidence that the overall monetary transmission channel is stronger in the bank-based system compared to the market-based. While the growth in credit is larger in the market-based system, uncertainty originated from imperfect beliefs produce impulse responses in macroeconomic variables that are, on average, half of those in the bank-based model. At the same time we find mixed results on the conditional effectiveness of monetary policy to offset contractions. Conditional on being in a recession, a monetary expansion in a market-based system creates higher successive booms. That said, a monetary easing in the bank-based system is more effective in smoothening the financial-and business cycles.