Discussion Paper

Entrepreneurial moral hazard and bank monitoring: a model of the credit channel

Abstract: This paper develops a model of the choice between bank and market finance by entrepreneurial firms that differ in the value of their net worth. The monitoring associated with bank finance ameliorates a moral hazard problem between the entrepreneurs and their lenders. The model is used to analyze the different strands of the credit view of the transmission of monetary policy. In particular, we derive the empirical implications of a broad credit channel, and compare them to those obtained when the model is extended to incorporate some elements of the bank lending channel.

Keywords: Credit; Bank supervision;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1999

Number: 129