Abstract
This article employs a dynamic stochastic general equilibrium framework to examine asymmetric information and limited contract enforcement in financial markets, where firms have access to both inte...
Highlights
The role that financial factors and financial development play in economic activity has long been documented in the business-cycle literature (Carlstrom & Fuerst, 1997, 1998; Gertler, 1988)
We show that as the degree of limited enforcement increases from 40% to 70%, the average consumption equivalent welfare loss increases from 0:9% to 1:89%
Concluding remarks This study presents a dynamic stochastic general equilibrium model of asymmetric information and limited contract enforcement in financial markets
Summary
The role that financial factors and financial development play in economic activity has long been documented in the business-cycle literature (Carlstrom & Fuerst, 1997, 1998; Gertler, 1988). The present paper seeks to do so within the context of a Dynamic Stochastic General Equilibrium (DSGE) model It studies the implications of limited enforcement for financial intermediation, small firm funding, economic growth and welfare. The study follows Bernanke et al (1999), De Fiore et al (2011), Carlstrom and Fuerst (1998, 2001), and Carlstrom, Fuerst, and Paustian (2010) on asymmetric information in financial markets According to these authors to engage in investment opportunities, risk-neutral entrepreneurs have the potential to access funds from lenders. The section, 2.2, sets out the general equilibrium environment (comprising households, entrepreneurs, firms and the CMF/Bank) using the optimal results from the financial contracting problem. Firms produce the single consumption good, but it is assumed that these consumption-producing firms are not subject to any agency problems
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