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Interest rate control in a model of monetary policy

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  • Spencer Dale
  • Andrew Haldane

Abstract

A monetary economy comprises a vast array of market-clearing interest rates. Central banks exert a direct influence over only a narrow subset of these rates: the rate at which they supply marginal funds to the commercial banking system. Accordingly, the market interest rates which impinge upon real activity are typically distinct form - though not independent of - the official interest rate. This paper develops a formal model of the interactions between the central bank, commercial banks and the non-bank private sector. This model is then used to analyse the relationship between the official interest rate and 'other' market rates. Some illustrative evidence on the extent of the imperfection in the UK authorities' interest rate control is also considered. Two policy conclusions emerge. First the authorities must understand the nature of the feed-through of official interest rates into market rates when deciding on the appropriate level of the monetary instrument. Second, the possibility that interest rates may not all move perfectly in line, implies that policy-makers and commentators alike need to be conscious of this plurality of interest rates when assessing the overall tightness or looseness of monetary conditions.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1993/wp17.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 17.

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Date of creation: Sep 1993
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Handle: RePEc:boe:boeewp:17

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  1. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
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Cited by:
  1. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
  2. Paolo Chiades & Leonardo Gambacorta, 2004. "The Bernanke and Blinder Model in an Open Economy: The Italian Case," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 1-34, 02.
  3. Marco Gallegati, 2001. "Financial constraints and the balance sheet channel: a re-interpretation," Heterogeneity and monetary policy 0112, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
  4. Kierzenkowski, Rafal, 2002. "The Bank Lending Channel Asymmetry and the Efficiency of the Polish Interest Rate Monetary Policy during Transition," Economics Papers from University Paris Dauphine 123456789/3303, Paris Dauphine University.
  5. J T Kneeshaw, 1995. "A survey of non-financial sector balance sheets in industialised countries: implications for the monetary policy transmission mechanism," BIS Working Papers 25, Bank for International Settlements.
  6. Kierzenkowski, Rafal, 2005. "The multi-regime bank lending channel and the effectiveness of the Polish monetary policy transmission during transition," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 1-24, March.
  7. Jack R. Rogers, 2013. "Monetary Transmission to UK Retail Mortgage Rates before and after August 2007," Discussion Papers 1307, Exeter University, Department of Economics.
  8. Gambacorta, Leonardo, 2003. "Asymmetric bank lending channels and ECB monetary policy," Economic Modelling, Elsevier, vol. 20(1), pages 25-46, January.
  9. Kierzenkowski, Rafal, 2002. "The Multi-Regime Bank Lending Channel and the Effectiveness of the Polish Monetary Policy Transmission During Transition," CEPR Discussion Papers 3624, C.E.P.R. Discussion Papers.

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