Article ID Journal Published Year Pages File Type
5104356 Review of Economic Dynamics 2017 23 Pages PDF
Abstract
In the financial accelerator literature pioneered by Bernanke et al. (1999) entrepreneurs are myopic and risk-neutral, and loans have a predetermined rate of return by assumption. We relax these assumptions and derive the optimal state-dependent loan contract for forward-looking risk-averse entrepreneurs. We show that financial frictions deliver less amplification under the optimal state-dependent contract.
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Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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The financial accelerator and the optimal state-dependent contract
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