Entrepreneurial Finance, Home Equity, and Monetary Policy

Abstract

We model entrepreneurial finance using a combination of fiat money, traditional bank loans, and home equity loans. The banking sector is over-the- counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The results show that the strength of this channel depends on the combination of nominal and real assets used to finance investments, and thus declines in the extent to which housing is accepted as collateral. A calibration to the U.S. economy supports the theoretical results and provides novel insights on entrepreneurial finance between 2000 and 2016.