Relationship finance, informed liquidity, and monetary policy

We study the aggregate effects of credit relationships in an economy where lenders provide liquidity and expertise to firms distress. Lenders' effort restructuring firms' investments endogenously depends on their financial involvement investments. Firms trade off benefits precautionary internal with need incentivize lenders' through involvement. find that, these intensive margin effects, can induce overinvestment, calling for a positive interest rate policy that departs from Friedman rule. Credit relationships, however, enhance resilience investment economic conditions. Unconventional monetary policies inject into lending sector stabilizing but have ambiguous welfare consequences.