Research

This paper studies how asymmetric information in bank lending relationships shapes credit allocation and the aggregate economy's response to shocks. I develop a novel directed search model with long-term contracts in which firms privately know their types and banks offer state-contingent contracts as a screening device. When banks have imperfect information about borrower types, incentive constraints distort equilibrium interest rates and market tightness, limiting credit for good firms. Despite this, when calibrated using US data, I show that the welfare cost of asymmetric information is small, about 0.04% of consumption relative to the full-information benchmark. This is because long-term contracts enable banks to spread the distortion over the tenure of a relationship. Through the lens of my model, to generate more than 1% welfare loss from asymmetric information would require either implausibly slow learning or an implausibly short duration of the relationship that are inconsistent with the data.

This paper studies monetary non-neutrality with multi-product firms that face information frictions in a Rational Inattention framework. I expand a standard menu-cost with information friction in Woodford (2009) to a multi-product setting and compare the effect of monetary contraction in a single product vs two product economy. In the preferred calibration, I show that monetary policy shocks in a two-product economy yield a lower monetary non-neutrality than in a single-product. I highlight how economies of scope in price setting and decreasing selection effect work in an opposite direction in affecting non-neutrality.