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Credit Channel with Sovereign Credit Risk: an Empirical Test

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  • Victorio Yi Tson Chu

Abstract

According to Bernanke and Gertler (1995), the Credit Channel amplifies the traditional monetary transmission and this amplification effect comes through the firm's external finance premium, which is a wedge between the expected return for the funds generated internally and the costs of funds raised externally to the firm. Traditionally, this wedge is the bank loan spread but we extend this concept to include the sovereign (country) credit risk and name it, Extended Credit Channel. Armed with this new concept and using a set up model, we estimate two econometric equations for the Brazilian economy after its inflation stabilization program . These two econometric equations measure: (1) the effects of the pure money channel (real interest rates and compulsory reserve requirements on demand deposits) and the extended credit channel (country credit risk and bank loan spread) on the economy's production, and (2) the impacts of the real interest rates, compulsory reserve requirements on demand deposits, and country credit risk on the bank loan spread. Both equations coefficients signs conform to the expected theoretical model. With the results of the estimated equation (1), we define a Product Loss Index Number to compare these two transmission channels (extended credit and pure monetary). This comparison shows that the extended credit channel is a relevant as the pure monetary channel.

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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 51.

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Date of creation: Sep 2002
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Handle: RePEc:bcb:wpaper:51

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Web page: http://www.bcb.gov.br/?english

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  1. Francisco Marcos R. Figueiredo & Roberta Blass Staub, 2001. "Algumas Considerações Sobre a Sazonalidade no IPCA," Working Papers Series 31, Central Bank of Brazil, Research Department.
  2. Marco Antonio Bonomo & Ricardo D. Brito, 2001. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Working Papers Series 28, Central Bank of Brazil, Research Department.
  3. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
  4. Benjamin Miranda Tabak & Sandro Canesso de Andrade, 2001. "Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates," Working Papers Series 30, Central Bank of Brazil, Research Department.
  5. Pedro H. Albuquerque, 2005. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Public Economics 0511020, EconWPA, revised 26 Nov 2005.
  6. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  7. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  8. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
  9. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  10. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  11. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
  12. Paulo Coutinho & Benjamin Miranda Tabak, 2001. "Decentralized Portfolio Management," Working Papers Series 22, Central Bank of Brazil, Research Department.
  13. Pedro Cavalcanti Ferreira & Osmani Teixeira de Carvalho Guillén, 2004. "Estrutura Competitiva, Produtividade Industrial e Liberalização Comercial no Brasil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 58(4), pages 507-532, October.
  14. Sandro Canesso de Andrade & Benjamin Miranda Tabak, 2001. "Is it Worth Tracking Dollar/Real Implied Volatility?," Working Papers Series 15, Central Bank of Brazil, Research Department.
  15. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
  16. Sergio Afonso Lago Alves, 2001. "Evaluation of the Central Bank of Brazil Structural Model's Inflation Forecasts in an Inflation Targeting Framework," Working Papers Series 16, Central Bank of Brazil, Research Department.
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