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Short-Run and Long-Run Effects of Banking in a New Keynesian Model

  • Casares Miguel

    ()

    (Universidad Pública de Navarra)

  • Poutineau Jean-Christophe

    ()

    (Université de Rennes 1)

This paper introduces both endogenous capital accumulation and deposit-in-advance requirements for investment in the banking model of Goodfriend and McCallum (2007). Impulse response functions from technology and monetary shocks show some attenuation effect due to the procyclical behavior of the marginal finance cost. In addition, an adverse financial shock produces sizeable declines in output, inflation and interest rates. In the long-run analysis, we finnd the following effects of banking intermediation: (i) the stock of capital increases to take advantage of its collateral services, and (ii) consumption and labor fall in response to the finance cost attached to purchases of goods. Using the baseline calibrated model, we show how a 10 percent increase in banking efficiency would result in a permanent welfare gain equivalent to 0.3 percent of output.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 11 (2011)
Issue (Month): 1 (May)
Pages: 1-41

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Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:16
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  1. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series 1043, European Central Bank.
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