Agency costs, net worth, and business fluctuations

Ben Bernanke, Mark Gertler

    Research output: Contribution to journalArticlepeer-review


    This paper develops a simple neoclassical model of the business cycle in which 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.

    Original languageEnglish (US)
    Pages (from-to)14-31
    Number of pages18
    JournalAmerican Economic Review
    Issue number1
    StatePublished - Mar 1989

    ASJC Scopus subject areas

    • Economics and Econometrics


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