Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 245 Abstract:
Recent developments in monetary economics stress the nature of monetary injections, emphasizing that these have implications for the relationship between money and prices. In constrast, traditional approaches posit stable money demand functions that are independent of how money is injected. The former approach implies that certain proportionality relations between money and prices need not obtain. This permits the two approaches to be empirically distinguished, but only if an appropriate "experiment" is conducted. The colonial period is one such experiment. Colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply.
Keyword: Quantity theory of money, Sargent-Wallace theory of money, Monetary injections, and Value of money Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and N11 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: Pre-1913
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 202 Abstract:
A model of credit rationing based on asymmetrically informed borrowers and lenders is developed. In this context, sufficient conditions are derived for an appropriate government policy response to credit rationing to be a continuously open discount window. It is also demonstrated that such a policy can be deflationary, and that given a commitment to operate in this way, the monopoly issue of liabilities can Pareto dominate their competitive issuance.
Keyword: Federal lending, Assymetric information, Credit limit, Jaffee-Russel model, and Government loans Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, E51 - Money Supply; Credit; Money Multipliers, and H81 - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
We consider an environment in which risk-neutral firms must obtain external finance. They have access to two kinds of linear, stochastic investment opportunities. For one, return realizations are costlessly observed by all agents. For the other, return realizations are costlessly observed only by the investing firm; however, they can be (privately) observed by outsiders who bear a fixed verification cost. Thus, the second investment opportunity is subject to a standard costly state verification (CSV) problem of the type considered by Townsend (1979), Gale and Hellwig (1985), or Williamson (1986, 1987).
We examine the optimal allocations of investment between the two kinds of projects, as well as the optimal contract used to finance it. We show that the optimal contractual outcome can be supported by having firms issue appropriate (and determinate) quantities of debt and equity securities to outside investors.
The optimal debt-equity ratio necessarily depends (in part) on the firm’s asset structure. Investments in projects subject to CSV problems are associated (in a sense to be made precise) with the use of debt—as might be expected from the existing CSV literature. Investments in projects with publicly observable returns are associated with the use of external equity.
We examine in detail the relationship between the optimal asset and liability structure of the firm. We also describe conditions under which an increase in the cost of state verification shifts the composition of investment towards projects with observable returns, and reduces the optimal debt-equity ratio. Interestingly, the optimal debt-equity ratio is also shown to depend on factors that are irrelevant to asset allocations.
Finally, a large part of the interest in CSV environments has been due to the fact that they may result in equilibrium credit rationing. Our analysis has strong implications for the possibility of equilibrium credit rationing in more general CSV models.
Subject (JEL): G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and E51 - Money Supply; Credit; Money Multipliers