Agency Costs, Net Worth, and Business Fluctuations : A Computable General Equilibrium Analysis

Abstract

This paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business cycle dynamics. The model resembles the influential theoretical work of Bemanke and Gertler ( 1989), from whom we borrow our title. The model is calibrated to match key features of U.S. aggregate activity. Two sources of shocks are considered: shocks to the distribution of wealth and shocks to aggregate productivity. We reach two conclusions. First, "debt-deflations" can have a significant and persistent effect on real activity. In the case of large monitoring costs, a relatively small wealth redistribution (corresponding to a one-time annual surprise inflation of 1.0 percent) leads to a 0.5 percent increase in investment spending. Second, the agency-cost model naturally delivers a hump-shaped investment response to a productivity shock. This is because households delay their investment decisions until agency costs are at their lowest, a point in time several periods after the initial shock.

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory

“…Our paper is related to an extensive literature on the effect of fi-nancial frictions in macroeconomics, starting from Bernanke and Gertler (1989), Carlstrom and Fuerst (1997), Kiyotaki and Moore (1997), Bernanke et al (1999) and more recently Kiyotaki and Moore (2008) and Jermann and Quadrini (2011). The common goal is to identify and understand the channels through which financial market disruptions affect economic activity and their quantitative importance.…”

The financial accelerator in an estimated New Keynesian model

“…The procyclical nature of net worth leads the wedge between the cost of external finance and internal funds, the external finance premium, to fall during booms and to rise during recessions. Bernanke et al (1999) and others, including Kiyotaki and Moore (1997) and Carlstrom and Fuerst (1997), demonstrate that these financial frictions may significantly amplify the magnitude and the persistence of fluctuations in economic activity.…”

Credit Markets and the Propagation of Monetary Policy Shocks

“…Since the seminal contribution of Bernanke and Gertler [2], a strand of the literature has analyzed the macroeconomic implications of financial frictions with models where financial constraints arise endogenously (see, among others, Bernanke, Gertler and Gilchrist [3], Carlstrom and Fuerst [7], Fuerst [12], Hubbard [13], and Kiyotaki and Moore [15]). These papers, however, are representative agents models.…”