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Household credit and the monetary transmission mechanism

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  • Victor Li
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    Abstract

    This paper evaluates the importance of household credit in the transmission of monetary policy and in explaining the positive correlation between money and credit services over the business cycle. It does so in the context of a general equilibrium framework of cash and household credit with two distinguishing features. There is an explicit financial sector with firms specializing in the production of credit services. Second, the financial sector also contains financial intermediaries who provide interest bearing accounts for households and loanable funds to credit producers. It is shown that monetary injections in this set-up can generate a liquidity effect which positively influences the availability of household credit services and real activity. Furthermore, the model predicts that monetary injections actually lower the real cost of consumption, thus resolving a difficulty with recent liquidity effect models. The potential quantitative importance of this monetary transmission mechanism is analyzed.

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    File URL: http://research.stlouisfed.org/wp/more/1998-019
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-019.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedlwp:1998-019

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    Keywords: Housing ; Housing - Finance;

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    1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
    2. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-36, November.
    3. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    4. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
    5. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
    6. Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 483-503, August.
    7. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," NBER Working Papers 3974, National Bureau of Economic Research, Inc.
    9. John V. Duca, 1995. "Credit availability, bank consumer lending, and consumer durables," Working Papers 9514, Federal Reserve Bank of Dallas.
    10. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
    11. Sangkyun Park, 1993. "The determinants of consumer installment credit," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-38.
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