Bernanke and Gertler (1989) focus on the investment decision of rms. There is asymmetric information between lenders and entrepreneurs: while entrepreneurs know the pro tability of their investment projects, lenders must pay an auditing cost to observe the project's return. This information asymmetry is the key source of persistence in the model. A positive productivity shock increases savings of entrepreneurs and lowers agency costs, making it easier for them to obtain external nance. As a result, more investment projects are nanced, which creates employment for young agents and leads to further income expansion in subsequent periods. Kiyotaki and Moore (1997) add an additional element to this story: the.
