International Finance Discussion Papers (IFDP)
September 1993
Long-Term Banking Relationships in General Equilibrium
Abstract:
I examine the relationship between a financial intermediary ("bank") and a borrowing firm in a three-period overlapping generations model. The model can accommodate two financing arrangements between the bank and the firm: one requires commitment to a long-term contract, the other does not. Which arrangement is chosen depends on whether such a commitment can be credibly made. After defining the two arrangements, I compare their features with real-world financial dealings. Once the form of the long-term relationship between the bank and the firm is set, investment and output of the economy can be determined. Disruptions in financial markets can affect real investment and output by disrupting established long-term relationships.
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