Do Banks Matter? A Credit View Model for Small Open Economies
AbstractThe Mundell-Fleming model is expanded to include a "credit channel" by adding a market for bank loans. In contrast to the predictions of the traditional Mundell-Fleming model, asset shifts in bank portfolios between bonds and bank loans produce aggregate demand effects in our credit-channel model. We test this hypothesis with an empirical growth model estimated with data from small open economies: the U.S. states. The evidence supports our "credit view" model's prediction that variations in bank lending decisions can produce economically significant fluctuations in aggregate demand, and may initiate or amplify economic contractions and expansions.
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Bibliographic InfoPaper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-13.
Length: 28 pages
Date of creation: 2003
Date of revision:
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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
More information through EDIRC
Bank Lending; Credit; Credit Channel; Economic Growth;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- 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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