The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number
08-27.
Length: 37 pages Date of creation: May 2008 Date of revision:
Nov 2008 Handle: RePEc:kud:kuiedp:0827
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kiyotaki, Nobuhiro & Moore, John, 1997.
"Credit Cycles,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 211-48, April.
Other versions:
Nobuhiro Kiyotaki & John Moore, 1995.
"Credit Cycles,"
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
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John Moore & Nobuhiro Kiyotaki, .
"Credit Cycles,"
Discussion Papers
1995-5, Edinburgh School of Economics, University of Edinburgh.