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Monetary Policy And The Financing Of Firms

Date Added: Aug 2009
Format: PDF

During financial crises, credit conditions tend to worsen for all agents in the economy. In the press, there are frequent calls for a looser monetary policy stance, on the grounds that this helps avoid a deep recession and the risks of a credit crunch. The intuitive argument is that lower interest rates tend to make it easier for firms to obtain external finance, thus countering the effects of the tightening of credit standards. Arguments tracing back to Fisher (1933) can also be used to call for some degree of inflation during financial crises, so as to avoid an excessive increase in firms leverage through a devaluation of their nominal liabilities.