The asymmetric effects of monetary policy in a matching model with a balance sheet channel

This paper shows that monetary policy can have asymmetric effects in a matching model along the lines of D. Mortensen and C. Pissarides [1994. Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397-415]. when a balance sheet channel is at work. When a lender matches an entrepreneur, the investment project is financed and carried out. There is incomplete information ex post: firms can be randomly hit by shocks that change their financial position. If this falls under a critical value there is investment destruction. The asymmetric behavior of financial prices and investment flows following a monetary shock provides an explanation for monetary contractions having a greater effect than equally sized monetary expansions. (c) 2006 Elsevier Inc. All rights reserved.