Credit market frictions in an open economy

Vol: 
04/2006
Author name: 
Claus I
Kim K
Year: 
2006
Month: 
January
Abstract: 

This paper assesses the effects of asymmetric information and agency costs in credit markets in an open economy with a floating exchange rate and sticky prices. A decline in agency costs lowers the cost of external finance and increases the long-run level of steady state investment, capital and output. Agency costs also affect the business cycle and the central bank’s response to shocks in the economy. Following a supply (demand) shock to the economy agency costs dampen (magnify) output fluctuations. The results thus underline the importance of incorporating credit markets into macroeconomic models.

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