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On Monetary Policy Implications of Credit Rationing under Asymmetric Information

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Author Info

  • Frédérique Bracoud

    ()
    (Department of Economics University of Keele)

Abstract

This paper analyses the monetary policy transmission mechanisms through the banking sector. Banks are assumed to compete a la Bertrand in a loan market characterized by adverse selection. Stiglitz and Weiss' (1981) set-up is extended to introduce leakages of reserves from the banking system, compulsory reserves, and loans from the central bank. The paper shows that the banks' re- serves management strategy is totally subordinated to the dictates of competition in the loan market. This generates some unusual results. For instance, if the central bank increases the legal reserve requirement, the banks' reserve ratio may decrease. In addition, the paper confirms that when credit is rationed, monetary policy is transmitted through quantities. Nevertheless, in spite of a rigid credit rate, some price adjustment transmission mechanism does actually occur under credit rationing since the deposit rate reacts.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/0010.pdf
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Bibliographic Info

Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 2000/10.

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Length: 31 pages
Date of creation: 2000
Date of revision: Feb 2001
Handle: RePEc:kee:keeldp:2000/10

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Banking; Bertrand competition; Credit channel; Monetary policytransmission; Adverse selection; Credit rationing;

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