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Lending Relationships and Monetary Policy

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  • Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,

    ()
    (yak-soy@ems.bbk.ac.uk, javier.martinez@brunel.ac.uk)

Abstract

Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2009:18.

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Length: 42 pages
Date of creation: 21 Jan 2010
Date of revision: 21 Jan 2010
Handle: RePEc:hhs:uunewp:2009_018

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Keywords: Endogenous Banking Spread; Credit Markets; Cost Chanell of Monetary Transmission; Firm-bank Relationships;

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References

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  16. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Lending Relationships and Monetary Policy
    by Christian Zimmermann in NEP-DGE blog on 2009-12-06 16:11:53
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Cited by:
  1. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2012. "Universal banking, competition and risk in a macro model," Discussion Papers 1201, Exeter University, Department of Economics.
  2. Villa, Stefania & Yang, Jing, 2011. "Financial intermediaries in an estimated DSGE model for the United Kingdom," Bank of England working papers 431, Bank of England.
  3. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2013. "Universal vs separated banking with deposit insurance in a macro model," Discussion Papers 1308, Exeter University, Department of Economics.
  4. Alberto Musso & Stefano Neri & Livio Stracca, 2011. "Housing, consumption and monetary policy: how different are the U.S. and the euro area?," Temi di discussione (Economic working papers) 807, Bank of Italy, Economic Research and International Relations Area.
  5. Giovanni Melina & Stefania Villa, 2011. "Fiscal Policy and Lending Relationships," Birkbeck Working Papers in Economics and Finance 1103, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Ahmed, Shahzad & Ahmed, Waqas & Khan, Sajawal & Pasha, Farooq & Rehman, Muhammad, 2012. "Pakistan Economy DSGE Model with Informality," MPRA Paper 53135, University Library of Munich, Germany.

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