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Monetary policy through the “credit-cost channel”. Italy and Germany

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Author Info
Giuliana Passamani
Roberto Tamborini ()

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Abstract

In this paper we wish to extend the empirical content of the "credit-cost channel" of monetary policy that we proposed in Passamani and Tamborini (2005). In the first place, we replicate the econometric estimation of the model for Italy, to which we add Germany. We find confirmation that, in both countries, firms' reliance on bank loans (“credit channel”) makes aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the inter-bank rate controlled by the central bank plus a credit risk premium charged by banks on firms. The second extension consists of a formal econometric analysis of the idea that the interest rate is an instrument of control for the central bank. The empirical results of the CCC model that, according to Johansen and Juselius (2003), innovations in the inter-bank rate qualify this variables as a "control variable" in the system. Hence we replicate the Johansen and Juselius technique of simulation of rule-based stabilization policy. This is done for both Italy and Germany, on the basis of the respective estimated CCC models, taking the inter-bak rate as the instrument and the inflation of 2% as the target. As a result, we find confirmation that inflation-targeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the "AS curve", that is, the path of realizations in the output-inflation space.

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Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 0609.

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Date of creation: 2006
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Handle: RePEc:trn:utwpde:0609

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Related research
Keywords: Macroeconomics and monetary economics; Monetary transmission mechanisms; Structural cointegration models; Italian economy; German economy;

Find related papers by JEL classification:
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  1. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, vol. 113(487), pages 412-455, 04. [Downloadable!] (restricted)
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  2. Giuliana Passamani & Roberto Tamborini, 2005. "Why does money matter? A structural analysis of monetary policy, credit and aggregate supply effects in Italy," Department of Economics Working Papers 0511, Department of Economics, University of Trento, Italia. [Downloadable!]
  3. Marvin J. Barth III & Valerie A. Ramey, 2000. "The Cost Channel of Monetary Transmission," NBER Working Papers 7675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Soren Johansen & Katarina Juselius, 2001. "Controlling Inflation in a Cointegrated Vector Autoregressive Model with an Application to US Data," Discussion Papers 01-03, University of Copenhagen. Department of Economics. [Downloadable!]
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  5. Riccardo Fiorentini & Roberto Tamborini, 2001. "The Monetary Transmission Mechanism in Italy: The Credit Channel and a Missing Ring," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 60(1), pages 1-42, June. [Downloadable!]
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  6. Leonardo Gambacorta, 2001. "Bank-Specific Characteristics and Monetary Policy Transmission: The Case of Italy," Temi di discussione (Economic working papers) 430, Bank of Italy, Economic Research Department. [Downloadable!]
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  7. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  8. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Blackwell Publishing, vol. 95(1), pages 43-64.
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  9. Trautwein, Hans-Michael, 2000. " The Credit View, Old and New," Journal of Economic Surveys, Blackwell Publishing, vol. 14(2), pages 155-89, April. [Downloadable!] (restricted)
  10. 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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  11. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  12. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June. [Downloadable!] (restricted)
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