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Bank Intermediation over the Business Cycle

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Author Info

  • Einarsson, Tor
  • Marquis, Milton H

Abstract

A model is developed in which banks engage in valued asset transformation by converting illiquid assets (working capital loans) into highly liquid demand deposit accounts that households use for transactions purposes. Consumption-smoothing behavior induces countercyclicality in the degree to which firms rely on bank borrowings to finance their working capital expenses, which is consistent with U.S. data. The importance of financial markets that provide alternative sources of short-term funds to firms is also illustrated. Absent these markets, nominal interest rates become nearly perfectly positively correlated with output, which is counterfactual, and monetary shocks induce (perhaps, artificially) large aggregate employment responses.

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Bibliographic Info

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

Volume (Year): 33 (2001)
Issue (Month): 4 (November)
Pages: 876-99

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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:4:p:876-99

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

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Cited by:
  1. Tor Einarsson & Milton H. Marquis, 2003. "Bank Intermediation and Persistent Liquidity Effects in the Presence of a Frictionless Bond Market," Economics wp21_tor, Department of Economics, Central bank of Iceland.
  2. Milton H. Marquis, 2003. "Bank lending to businesses in a jobless recovery," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul25.
  3. Tor Einarsson & Milton H. Marquis, 2002. "Banks, bonds, and the liquidity effect," Economic Review, Federal Reserve Bank of San Francisco, pages 35-50.
  4. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Money Macro and Finance (MMF) Research Group Conference 2005 74, Money Macro and Finance Research Group.
  5. Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behaviour," BIS Working Papers 125, Bank for International Settlements.
  6. Richard K. Lyons, 2002. "Foreign exchange: macro puzzles, micro tools," Economic Review, Federal Reserve Bank of San Francisco, pages 51-69.
  7. Jahangir Aziz & Li Cui, 2007. "Explaining China's Low Consumption: The Neglected Role of Household Income," IMF Working Papers 07/181, International Monetary Fund.
  8. Ryo Kato, 2004. "Liquidity, Infinite Horizons and Macroeconomic Fluctuations," Econometric Society 2004 Far Eastern Meetings 622, Econometric Society.
  9. 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.
  10. 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.
  11. Keiichiro Kobayashi & Masaru Inaba, 2006. "Borrowing constraints and protracted recessions," Discussion papers 06011, Research Institute of Economy, Trade and Industry (RIETI).
  12. Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series 0841, European Central Bank.

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