DP2060 Entrepreneurial Moral Hazard and Bank Monitoring: A Model of the Credit Channel

Author(s): Rafael Repullo, Javier Suarez
Publication Date: January 1999
Keyword(s): bank monitoring, Capital Requirements, Credit Markets, interest rate ceilings, Monetary transmission Mechanism
JEL(s): D82, E44, E50
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2060

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.