This model adds to the standard neoclassical model of business fluctuations by introducing a more realistic capital structure problem, where firms have to balance the tax benefits of debt with the costs of potential financial distress.Therefore, firms solve a dynamic problem with both an...

The credit channel of monetary policy has both cross-sectional and timeseries implications for the reaction of the economy to monetary shocks. This paper focuses on the more rarely investigated time-series aspect and shows that the economy has varying sensitivity to monetary shocks over time. By...