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The lending channel under optimal choice of monetary policy

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  • Kilponen , Juha

    ()
    (Bank of Finland Research)

  • Milne, Alistair

    ()
    (Cass Business School, City University, London and Bank of Finland Research)

Abstract

Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 33/2007.

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Length: 39 pages
Date of creation: 15 Dec 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_033

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: bank capital; bank lending; capital buffers; pro-cyclicality; capital regulation; cost channel; credit channel; loan margins; monetary trade-offs;

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References

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Citations

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Cited by:
  1. Milne , Alistair & Wood, Geoffrey, 2009. "The bank lending channel reconsidered," Research Discussion Papers 2/2009, Bank of Finland.
  2. David Mayes, 2011. "The future of financial markets: financial crisis avoidance," Empirica, Springer, vol. 38(1), pages 77-101, February.
  3. Alistair Milne, 2009. "Macroprudential policy: what can it achieve?," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 608-629, Winter.

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