Agency Costs, Net Worth, and Business Fluctuations : A Computable General Equilibrium Analysis

Abstract

This paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business cycle dynamics.The model resembles the influential theoretical work of Bemanke and Gertler ( 1989), from whom we borrow our title.The model is calibrated to match key features of U.S. aggregate activity.Two sources of shocks are considered: shocks to the distribution of wealth and shocks to aggregate productivity.We reach two conclusions.First, "debt-deflations" can have a significant and persistent effect on real activity.In the case of large monitoring costs, a relatively small wealth redistribution (corresponding to a one-time annual surprise inflation of 1.0 percent) leads to a 0.5 percent increase in investment spending.Second, the agency-cost model naturally delivers a hump-shaped investment response to a productivity shock.This is because households delay their investment decisions until agency costs are at their lowest, a point in time several periods after the initial shock.i