Economics Seminar (2020-02)

Topic: Lending Relationships and Optimal Monetary Policy (Joint with Russell Wong and Cathy Zhang)

Speaker: Guillaume Rocheteau, University of California, Irvine

Time: March 27, Friday. 09:00a.m. - 11:00a.m.

Location: Microsoft Teams Online Conference Room

Abstract:

We construct and calibrate a monetary model of corporatefinance with endogenous formation of lending relationships. The equilibrium features money demands byfirms that depend on their access to credit and a pecking order offinancing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms’ incentives to use internal or externalfinance. 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.

Introduction:

Guillaume Rocheteau is a professor of the Department of Economics, the university of California, Irvine.

More information://www.grocheteau.com

Your participation is warmly welcomed.