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Lending Relationships and Monetary Policy

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  • Yunus Aksoy
  • Henrique S. Basso
  • Javier Coto-Martinez

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0912a.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0912.

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Date of creation: Oct 2009
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Handle: RePEc:bbk:bbkefp:0912

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  1. Lending Relationships and Monetary Policy
    by Christian Zimmermann in NEP-DGE blog on 2009-12-06 16:11:53
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Cited by:
  1. Giovanni MELINA & Stefania VILLA, 2012. "Fiscal policy and lending relationships," Center for Economic Studies - Discussion papers ces12.06, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  2. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2011. "Housing, consumption and monetary policy: How different are the US and the euro area?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3019-3041, November.
  3. Villa, Stefania & Yang, Jing, 2011. "Financial intermediaries in an estimated DSGE model for the United Kingdom," Bank of England working papers 431, Bank of England.
  4. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2012. "Universal banking, competition and risk in a macro model," Discussion Papers 1201, Exeter University, Department of Economics.
  5. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2013. "Universal vs separated banking with deposit insurance in a macro model," Discussion Papers 1308, Exeter University, Department of Economics.
  6. Ahmed, Shahzad & Ahmed, Waqas & Khan, Sajawal & Pasha, Farooq & Rehman, Muhammad, 2012. "Pakistan Economy DSGE Model with Informality," MPRA Paper 53135, University Library of Munich, Germany.

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