This paper evaluates the importance of household credit in the transmission of monetary policy and explaining the positive correlation between money and credit services over the business cycle. It does so in the context of a general equilibrium framework with an explicit financial sector. Within this sector, there are firms which specialize in the production of household credit services and financial intermediaries who provide interest bearing accounts for households and loanable funds to credit producers. It is shown that monetary injections which occur through the financial sector can generate a liquidity effect that positively influences the availability of household credit services and overall real activity. Furthermore, the model predicts that liquidity effects working through this channel lowers the real costs associated with consumption and can quantitatively dominate the anticipated inflation effect, thus resolving a difficulty with recent liquidity effects models which emphasize only the business lending channel.
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Volume (Year): 32 (2000) Issue (Month): 3 (August) Pages: 335-56 Download reference. The following formats are available: HTML
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