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Monetary policy, credit markets, and banks: A DSGE perspective

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  • Rubio, Margarita

Abstract

The monetary policy transmission mechanism changed after the 2008 crisis. Evidence shows that credit markets and the banking system play now a predominant role in the pass-through of monetary policy to the real economy. This paper examines the monetary transmission mechanism in a Dynamic Stochastic General Equilibrium (DSGE) model that; on the one hand, includes a financial accelerator that operates through collateral constraints in credit markets, and, on the other hand, also presents regulatory constraints on the banking sector. Results show that the financial accelerator effects make monetary policy more effective, in line with the rest of the literature. However, the introduction of banks reduces part of this effectiveness due to regulatory requirements on bank capital, as observed during the crisis time. Furthermore, an optimal monetary policy analysis concludes that when adding all these ingredients into the model, monetary policy should respond more strongly to output and less to inflation than in a standard model new Keynesian model, due to the inclusion of extra distortions that create welfare trade-offs among agents.

Suggested Citation

  • Rubio, Margarita, 2020. "Monetary policy, credit markets, and banks: A DSGE perspective," Economics Letters, Elsevier, vol. 195(C).
    • Handle: RePEc:eee:ecolet:v:195:y:2020:i:c:s0165176520302974
    DOI: 10.1016/j.econlet.2020.109481
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    Cited by:

    1. Ben salem, salha & slama, ines, 2021. "Modeling the impact of Coronavirus uncertainty on bank system vulnerability and monetary policy conduct," MPRA Paper 107391, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; Pass-through; Credit; Banks; Collateral constraints; Financial accelerator;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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