| Abstract: |
This paper proposes a model that links households and firms, as usual, by
markets for factors and goods and, additionally, by a banking sector that
channels households' funds to firms and eliminates idiosyncratic risk. In
equilibrium, agency costs and tax benefits of corporate debt are equalizing
each other, which renders an institutionally based explanation of financial
structure. Adjustment of corporate finance adds to the ordinary savings
channel of fiscal and monetary policy. Taking real and financial interactions
into account, the model predicts a somewhat lower impact of fiscal policy on
macroeconomic aggregates as commonly assessed and a much stronger impact of
monetary policy. This amplification is caused by the banking sector's
translation of borrowing rates into lending rates and vice versa. |