Monetary Transmission and the Search for Liquidity
AbstractThis paper evaluates the implications of search and matching frictions in the financial market for the transmission of monetary policy. Borrowers and lenders participate in a decentralized loan market for the purpose of establishing long-term credit relationships and the provision of loanable funds to productive firms. Locating credit relationships is costly in terms of time and real resources and the interest rate is negotiated via a bargaining mechanism. This structure is incorporated into an otherwise standard monetary business cycle framework and used to study how such frictions in the credit market contribute to explaining the contemporaneous impact and propagation of monetary growth shocks and inflation. It is found that while anticipated inflation negatively impacts real activity it can also increase loan market participation and the inflow of newly established credit relationships. It is shown that while bargaining and costly search mitigate the traditional inflation tax effect of monetary injections, the existence of long term lending relations tend to dampen the immediate liquidity effects. The model also indicates that there may not necessarily exist a negative correlation between credit market tightness and aggregate activity. Furthermore, search frictions provide a potentially important mechanism for explaining the persistence of monetary shocks, an issue that has been problematic in limited participation models of the transmission mechanism.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Villanova School of Business Department of Economics and Statistics in its series Villanova School of Business Department of Economics and Statistics Working Paper Series with number 19.
Date of creation: Apr 2012
Date of revision:
Contact details of provider:
Web page: http://www.villanova.edu/business/facultyareas/economics/
More information through EDIRC
Firms; Search Model; Financial Market; Bargaining; Monetary Transmission;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D9 - Microeconomics - - Intertemporal Choice
- E0 - Macroeconomics and Monetary Economics - - General
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-CBA-2012-05-08 (Central Banking)
- NEP-DGE-2012-05-08 (Dynamic General Equilibrium)
- NEP-MON-2012-05-08 (Monetary Economics)
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.:
- Dressler, Scott J. & Li, Victor E., 2009.
"Inside money, credit, and investment,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(4), pages 970-984, April.
- John H. Boyd & Bruce Champ, 2006. "Inflation, banking, and economic growth," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
- Zsolt Becsi & Victor Li & Ping Wang, .
"Heterogeneous Borrowers, Liquidity, and the Search for Credit,"
Departmental Working Papers
2002-02, Department of Economics, Louisiana State University.
- Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2005. "Heterogeneous borrowers, liquidity, and the search for credit," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1331-1360, August.
- Giovanni Dell'Ariccia & Pietro Garibaldi, 2005.
"Gross Credit Flows,"
Review of Economic Studies,
Oxford University Press, vol. 72(3), pages 665-685.
- Andre Kurmann & Nicolas Petrosky-Nadeau, 2006.
"Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism,"
2006 Meeting Papers
365, Society for Economic Dynamics.
- André Kurmann & Nicolas Petrosky-Nadeau, 2007. "Search Frictions in Physical Capital Markets as a Propagation Mechanism," Cahiers de recherche 0712, CIRPEE.
- Giulio, NICOLETTI & Olivier, PIERRARD, 2006. "Capital Market Frictions and the Business Cycle," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2006053, Université catholique de Louvain, Département des Sciences Economiques.
- David Andolfatto & Paul Gomme, 1997.
"Monetary policy regimes and beliefs,"
Discussion Paper / Institute for Empirical Macroeconomics
118, Federal Reserve Bank of Minneapolis.
- David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
- S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1995.
"Transaction services, inflation, and welfare,"
551, Federal Reserve Bank of Minneapolis.
- Aiyagari, S.R. & Braum, T. & Eckstein, Z., 1995. "Transaction Services, Inflation and Welfare," Papers 27-95, Tel Aviv - the Sackler Institute of Economic Studies.
- S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction services, inflation, and welfare," Staff Report 241, Federal Reserve Bank of Minneapolis.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Blanchflower, D.G. & Oswald, A., 1991.
"What Makes an Entrepreneur?,"
Economics Series Working Papers
99125, University of Oxford, Department of Economics.
- Mortensen, Dale T & Pissarides, Christopher A, 1994.
"Job Creation and Job Destruction in the Theory of Unemployment,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(3), pages 397-415, July.
- Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2003.
"Credit Markets and the Propagation of Monetary Policy Shocks,"
UFAE and IAE Working Papers
599.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- RADIM BOHÁČEK & HUGO RODRÍGUEZ MENDIZÁBAL, 2007. "Credit Markets and the Propagation of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1429-1455, 09.
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2004. "Credit markets and the propagation of monetary policy shocks," CERGE-EI Working Papers wp244, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996.
"Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis,"
9602, Federal Reserve Bank of Cleveland.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
- Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
- Ben S. Bernanke & Mark Gertler, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
NBER Working Papers
5146, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
- Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
- Cook, David, 1999. "The liquidity effect and money demand," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 377-390, April.
- Scott Hendry & Kevin Moran, 2004. "Search in Financial Markets, and Monetary Policy," Computing in Economics and Finance 2004 126, Society for Computational Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher Kilby).
If references are entirely missing, you can add them using this form.