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Monetary Shocks, Agency Costs, and Business Cycles

This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper’s chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?

JEL Classification: E32, E44, E50

Keywords: business fluctuations, financial markets, macroeconomy, monetary policy 

Suggested citation: Carlstrom, Charles T., and Timothy S. Fuerst, 2000. “Monetary Shocks, Agency Costs, and Business Cycles,” Federal Reserve Bank of Cleveland, Working Paper, no. 00-11.

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