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Interest Rates, Banking Spreads and Credit Supply : The Real Effects

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Author Info
Fernando Barran
Virginie Coudert
Benoit Mojon

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Abstract

In a standard IS-LM model, the effects of monetary policy on real activity are felt through the demand for money and the (unique) interest rate. In reality, shocks in monetary policy will affect the relative structure of interest rates given imperfect substitution among financial instruments. In this paper we analyse the information content of the relative structure of interest rates on economic activity. Over and above currently defined spreads, we have defined spreads based on bank determined interest rates. The importance of these spreads is straightforward. In real economies, debt finance is the major source of external funds. Moreover, under realistic conditions of information asymmetry, loans from financial intermediaries are special. The expertise acquired by banks in the process of evaluating and screening applicants, and in monitoring loan performances enables them to extend credit to customers who find it difficult or impossible to obtain credit in the open markets. A reduced supply of loans or a rise in the cost of borrowing may depress the economy, to the extent that some borrowers are dependent on bank loans for credit.

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Paper provided by CEPII research center in its series Working Papers with number 1995-01.

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Date of creation: Mar 1995
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Handle: RePEc:cii:cepidt:1995-01

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Related research
Keywords: interest rate; banks; credit;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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  16. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec.. [Downloadable!]
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  23. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  25. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February. [Downloadable!] (restricted)
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  26. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January. [Downloadable!] (restricted)
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  28. E. P. Davis & S. G. B. Henry, 1994. "The Use of Financial Spreads as Indicator Variables: Evidence for the U.K. and Germany," IMF Working Papers 94/31, International Monetary Fund.
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  30. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation, Yale University. [Downloadable!]
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  32. Fernando Barran & Virginie Coudert & Benoit Mojon, 1994. "Transmission de la politique monetaire et credit bancaire, une application a 5 pays de l'OCDE," Working Papers 1994-03, CEPII research center. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Fernando Barran & Virginie Coudert & Benoit Mojon, 1996. "The transmission of Monetary Policy in the European Countries," Working Papers 1996-03, CEPII research center. [Downloadable!]
  2. Arturo Estrella & Frederic S. Mishkin, 1999. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Arturo Estrella & Frederic S. Mishkin, 1998. "The Term Structure of Interest Rates and Its Role in Monetary Policy for The European Central Bank," NBER Working Papers 5279, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Jean Pisani-Ferry, 1995. "L'Europe a geometrie variable, une analyse economique," Working Papers 1995-04, CEPII research center. [Downloadable!]
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