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Bank capital channels in the monetary transmission mechanism

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  • Bojan Markovic
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    Abstract

    Recent empirical evidence based on microdata panels indicates the importance of banks’ balance sheets for the monetary transmission mechanism. This paper builds a dynamic general equilibrium model to analyse the macroeconomic consequences of changes in the cost of bank capital, and thus the cost of bank credit. The model includes the interaction between the supply side (banking sector) and the demand side (corporate sector) of the credit market. The analysis suggests that bank capital channels may be an important part of the monetary transmission mechanism, particularly when there are large, direct shocks to banks’ balance sheets. Such shocks could occur when there are structural changes that affect the banking system. The impulse responses are likely to be magnified due to the interaction between the supply and the demand sides of the credit market.

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    Paper provided by Bank of England in its series Bank of England working papers with number 313.

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    Date of creation: Nov 2006
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    Handle: RePEc:boe:boeewp:313

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    Cited by:
    1. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto.
    2. Tayler, William & Zilberman, Roy, 2014. "Macroprudential Regulation and the Role of Monetary Policy," Dynare Working Papers 37, CEPREMAP.
    3. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 236-251.
    4. Hylton Hollander and Guangling Liu, 2013. "The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking," Working Papers 360, Economic Research Southern Africa.
    5. Ali Dib, 2010. "Capital Requirement and Financial Frictions in Banking: Macroeconomic Implications," Working Papers 10-26, Bank of Canada.
    6. Guangling (Dave) Liu & Nkhahle Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 18/2011, Stellenbosch University, Department of Economics.
    7. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(3), pages 555-576, March.
    8. Jorge, José, 2009. "Why do bank loans react with a delay to shifts in interest rates? A bank capital explanation," Economic Modelling, Elsevier, vol. 26(5), pages 799-806, September.
    9. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.

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