Credit Markets and the Propagation of Monetary Policy Shocks
AbstractThis paper analyzes the propagation of monetary policy shocks through the creation of credit in an economy. Models of the monetary transmission mechanism typically feature responses that last for a few quarters contrary to what the empirical evidence suggests. To propagate the impact of monetary shocks over time, these models introduce adjustment costs by which agents find it optimal to change their decisions slowly. This paper presents another explanation that does not rely on any sort of adjustment costs or stickiness. In our economy, agents own assets and make occupational choices. Banks intermediate between agents demanding and supplying assets. Our interpretation is based on the way banks create credit and how the monetary authority affects the process of financial intermediation through its monetary policy. As the central bank lowers the interest rate by buying government bonds in exchange for reserves, high productive entrepreneurs are able to borrow more resources from low-productivity agents. We show that this movement of capital among agents sets in motion a response of the economy that resembles an expansionary phase of the cycle. Copyright 2007 The Ohio State University.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 39 (2007)
Issue (Month): 6 (09)
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2004. "Credit markets and the propagation of monetary policy shocks," CERGE-EI Working Papers wp244, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2003. "Credit Markets and the Propagation of Monetary Policy Shocks," UFAE and IAE Working Papers 599.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
NBER Working Papers
6455, National Bureau of Economic Research, Inc.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Timothy S. Fuerst, 1994.
"Monetary and financial interaction in the business cycle,"
Federal Reserve Bank of Cleveland, pages 1321-1353.
- Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November.
- R. Glenn Hubbard, 1994. "Is There a `Credit Channel' for Monetary Policy?," NBER Working Papers 4977, National Bureau of Economic Research, Inc.
- R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
- Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
- Thomas Cooley & Ramon Marimon & Vicenzo Quadrini, 1999.
"Aggregate consequences of limited contract enforceability,"
Economics Working Papers
843, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2003.
- Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2004. "Aggregate Consequences of Limited Contract Enforceability," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 817-847, August.
- Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2003. "Aggregate Consequences of Limited Contract Enforceability," NBER Working Papers 10132, National Bureau of Economic Research, Inc.
- Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2003. "Aggregate Consequences of Limited Contract Enforceability," Working Papers 1, Barcelona Graduate School of Economics.
- Cooley, Thomas F & Marimon, Ramon & Quadrini, Vincenzo, 2004. "Aggregate Consequences of Limited Contract Enforceability," CEPR Discussion Papers 4173, C.E.P.R. Discussion Papers.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994.
"The effects of monetary policy shocks: evidence from the Flow of Funds,"
Working Paper Series, Macroeconomic Issues
94-2, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
- Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
- Jean-François Fagnart & Omar Licandro & Franck Portier, 1999. "Firm Heterogeneity, Capacity Utilization and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 433-455, April.
- Vincenzo Quadrini, 1997.
"Entrepreneurship, saving and social mobility,"
Discussion Paper / Institute for Empirical Macroeconomics
116, Federal Reserve Bank of Minneapolis.
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997.
"Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,"
American Economic Review,
American Economic Association, vol. 87(5), pages 893-910, December.
- Ryo Kato, 2002. "Matlab code for the Carlstrom-Fuerst AER (1997) model," QM&RBC Codes 112, Quantitative Macroeconomics & Real Business Cycles.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
- Canova, Fabio & Pina, Joaquim Pivis, 1999.
"Monetary Policy Misspecification in VAR Models,"
CEPR Discussion Papers
2333, C.E.P.R. Discussion Papers.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Pedro Pablo Álvarez Lois, 2003. "Capacity utilization and Monetary Policy," Banco de Espaï¿½a Working Papers 0306, Banco de Espa�a.
- Alexander Monge Naranjo, 2000. "Financial Markets, Creation and Liquidation of Firms and Aggregate Dynamics," Econometric Society World Congress 2000 Contributed Papers 1648, Econometric Society.
- R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
- Patrick A. Pintus & Yi Wen, 2010.
"Leveraged borrowing and boom-bust cycles,"
2010-027, Federal Reserve Bank of St. Louis.
- Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.
- Piti Disyatat, 2008. "Monetary policy implementation: Misconceptions and their consequences," BIS Working Papers 269, Bank for International Settlements.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.