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Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates

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Author Info
Pierre-Richard Agénor
Peter J. Montiel

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Abstract

This paper develops a simple static model with credit market imperfections and flexible prices for monetary policy analysis in a fixed-exchange rate economy. Lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself depends on firms' net worth. In the basic framework, banks' funding sources are perfect substitutes and the provision of liquidity by the central bank is perfectly elastic at the prevailing refinance rate. The model is used to perform a variety of experiments, such as changes in the refinance and reserve requirement rates, central bank auctions, shifts in the premium and contract enforcement costs, and changes in public spending and world interest rates. The analysis is then extended to examine credit targeting and sterilization policies.

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File URL: http://www.socialsciences.manchester.ac.uk/cgbcr/dpcgbcr/dpcgbcr76.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 76.

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Length: 47 pages
Date of creation: 2006
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Handle: RePEc:man:cgbcrp:76

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  5. Aaron Tornell & Frank Westermann, 2003. "Credit Market Imperfections in Middle Income Countries," NBER Working Papers 9737, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Booth, James R. & Booth, Lena Chua, 2006. "Loan Collateral Decisions and Corporate Borrowing Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 67-90, February. [Downloadable!] (restricted)
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  15. PIERRE-RICHARD AGÉNOR, 2006. "Market Sentiment and Macroeconomic Fluctuations under Pegged Exchange Rates," Economica, London School of Economics and Political Science, vol. 73(292), pages 579-604, November. [Downloadable!] (restricted)
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    • Cordoba, Juan & Ripoll, Marla, 2002. "Credit Cycles Redux," Working Papers 2002-07, Rice University, Department of Economics. [Downloadable!]
    • Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November. [Downloadable!] (restricted)
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  20. Bennett T. McCallum & Edward Nelson, 2000. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Leonardo Gambacorta, 2004. "How Do Banks Set Interest Rates?," NBER Working Papers 10295, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  25. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Koray Alper, 2007. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 93, Economics, The Univeristy of Manchester. [Downloadable!]
  2. Pierre-Richard Agénor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 120, Economics, The Univeristy of Manchester. [Downloadable!]
  3. Pierre-Richard Agénor & Karim El Aynaoui, 2008. "Excess Liquidity, Bank Pricing Rules, and Monetary Policy," Centre for Growth and Business Cycle Research Discussion Paper Series 105, Economics, The Univeristy of Manchester. [Downloadable!]
  4. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Centre for Growth and Business Cycle Research Discussion Paper Series 90, Economics, The Univeristy of Manchester. [Downloadable!]
    Other versions:
  5. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester. [Downloadable!]
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