Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197832 
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2017-57
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.
Subjects: 
Business fluctuations and cycles
Credit and credit aggregates
Economicmodels
Financial markets
JEL: 
E22
E32
E51
G2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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