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Household Credit and the Monetary Transmission Mechanism

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  • Li, Victor E
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    Abstract

    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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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 32 (2000)
    Issue (Month): 3 (August)
    Pages: 335-56

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    Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:3:p:335-56

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Szilárd Benk & Max Gillman & Michal Kejak, 2005. "Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 668-687, July.
    2. Dressler, Scott & Li, Victor, 2007. "Inside Money, Credit, and Investment," MPRA Paper 1734, University Library of Munich, Germany.
    3. Mattoscio Nicola & Colantonio Emiliano & Odoardi Iacopo & Perrucci Antonella, 2013. "Restriction Of Credit After The Crisis Or A Different Allocation Of Resources? The Italian Case," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 481-490, July.
    4. Daniel Kanda, 2006. "Credit Flows, Fiscal Policy, and the External Deficit of Bosnia and Herzegovina," IMF Working Papers 06/276, International Monetary Fund.
    5. Li, Victor E. & Chang, Chia-Ying, 2004. "The cyclical behavior of household and business investment in a cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 691-706, January.
    6. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.
    7. W. Douglas McMillin & William D. Lastrapes, . "Cross-Country Variation in the Liquidity Effect," Departmental Working Papers 2001-04, Department of Economics, Louisiana State University.
    8. Max Gillman & Michal Kejak, 2007. " Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series 0703, Centre for Dynamic Macroeconomic Analysis.
    9. Max Gillman & Anton Nakov, 2004. "Granger causality of the inflation-growth mirror in accession countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(4), pages 653-681, December.
    10. Norman Loayza & Klaus Schmidt-Hebbel, 2002. "Monetary Policy Functions and Transmission Mechanisms: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 1, pages 001-020 Central Bank of Chile.

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