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Lending Relationships And Monetary Policy

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  • YUNUS AKSOY
  • HENRIQUE S. BASSO
  • JAVIER COTO-MARTINEZ

Abstract

Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.

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File URL: http://hdl.handle.net/10.1111/j.1465-7295.2012.00453.x
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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 51 (2013)
Issue (Month): 1 (01)
Pages: 368-393

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Handle: RePEc:bla:ecinqu:v:51:y:2013:i:1:p:368-393

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Lending Relationships and Monetary Policy
    by Christian Zimmermann in NEP-DGE blog on 2009-12-06 16:11:53
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Cited by:
  1. Melina, Giovanni & Villa, Stefania, 2012. "Fiscal policy and lending relationships," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/348272, Katholieke Universiteit Leuven.
  2. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2011. "Housing, consumption and monetary policy: How different are the US and the euro area?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3019-3041, November.
  3. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2012. " Universal banking, competition and risk in a macro model," CDMA Working Paper Series 1205, Centre for Dynamic Macroeconomic Analysis.
  4. Villa, Stefania & Yang, Jing, 2011. "Financial intermediaries in an estimated DSGE model for the United Kingdom," Bank of England working papers 431, Bank of England.

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