ASYMMETRIC INFORMATION, FINANCIAL INTERMEDIATION, AND BUSINESS CYCLES

This incorporates a debt contracting problem with asymmetric informati on into a standard monetary business cycle model. The model incorporat es a limited participation assumption in order to induce a liquidity e ffect of monetary shocks and propagate monetary disturbances. The mode l economy shows that a positive money supply shock generates a decreas e in nominal interest rates and an increase in output level. Asymmetri c information amplifies the response of capital to the money supply sh ock, but does not propagate them in other ways. When the monetary shoc k is an innovation in reserve requirements, it induces a persistent re sponse of the economy.