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Capital-constrained loan creation, stock markets and monetary policy in a behavioral new Keynesian model

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  • Kotb, Naira
  • Proaño Acosta, Christian

Abstract

In this paper we incorporate a stock market and a banking sector in a behavioral macro-finance model with heterogenous and boundedly rational expectations. Households' savings are diversified among bank deposits and stock purchases, and banks' lending to firms is subject to capital-related costs. We find that households' participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the transmission of monetary policy to the economy significantly, and that households' deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against-the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability.

Suggested Citation

  • Kotb, Naira & Proaño Acosta, Christian, 2020. "Capital-constrained loan creation, stock markets and monetary policy in a behavioral new Keynesian model," BERG Working Paper Series 158, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:158
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    References listed on IDEAS

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    More about this item

    Keywords

    Behavioral Macroeconomics; Banking; Stock Markets; Monetary Policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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