Credit Allocation and Monetary shocks in a Model with Heterogeneous Lenders (original) (raw)

The paper presents a model of endogenous credit allocation with heterogeneous lenders. We consider three classes of agents' -firms, individual investors and banks. Banks differ according to their level of capital and monitoring technology. In a setting of moral hazard with limited liability, we stress that firms' ability to obtain external funds is conjointly determined by their own wealth, bank capital, and monitoring technology. We show that small (medium) firms invest with the small (large) bank and pay a high (low) interest rate whereas large firms are financed by the financial market. Moreover, we stress that restrictive monetary policy leads to a contraction in aggregate investment and to a credit reallocation mechanism, between the two banks and the market, similar to a "flight to quality" effect. This restrictive policy has a strong effect not on bank-dependent firms but on small bank-dependent firms.