Monetary Shocks, Agency Costs and Business Cycles

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System Working papers are now available electronically through the Cleveland Fed's home page on the World Wide Web: 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 chief contribution of the paper 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? 1 Monetary shocks, agency costs and business cycles * Summary: 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 chief contribution of the paper 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? _________________ * The opinions are solely those of the authors and do not necessarily represent those of the Federal Reserve System.