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Agency Costs, Net Worth, and Business Fluctuations

Ben Bernanke and Mark Gertler
The American Economic Review
Vol. 79, No. 1 (Mar., 1989), pp. 14-31
Stable URL: http://www.jstor.org/stable/1804770
Page Count: 18
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Agency Costs, Net Worth, and Business Fluctuations
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Abstract

This paper develops a simple neoclassical model of the business cycle in which the condition of borrowers' balance sheets is a source of output dynamics. The mechanism is that higher borrower net worth reduces the agency costs of financing real capital investments. Business upturns improve net worth, lower agency costs, and increase investment, which amplifies the upturn; vice versa, for downturns. Shocks that affect net worth (as in a debt-deflation) can initiate fluctuations.

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