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Monetary shocks and central bank liquidity with credit market imperfections

  • Pierre-Richard Agénor
  • Koray Alper

This paper analyses the transmission process of monetary policy in a closed-economy New Keynesian model with monopoly banking and a cost channel. The loan rate depends on the repayment probability, which in turn depends on firms' net worth and cyclical output. The supply of bank loans is perfectly elastic at the prevailing loan rate and so is the provision of central bank liquidity at the policy rate. Numerical simulations, based on an illustrative calibration, show that credit market imperfections and sluggish adjustment of bank deposit rates may impart a substantial degree of persistence in the response of output and inflation to monetary shocks. With flexible wages, a relatively high elasticity of the repayment probability with respect to cyclical output is required for a monetary contraction to lead to higher inflation, that is, to a price puzzle. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpr037
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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 64 (2012)
Issue (Month): 3 (July)
Pages: 563-591

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Handle: RePEc:oup:oxecpp:v:64:y:2012:i:3:p:563-591
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  1. Solange Berstein & Rodrigo Fuentes, 2005. "Concentration and Price Rigidity: Evidence for the Deposit Market in Chile," Working Papers Central Bank of Chile 311, Central Bank of Chile.
  2. Benjamin Keen & Yongsheng Wang, 2007. "What is a realistic value for price adjustment costs in New Keynesian models?," Applied Economics Letters, Taylor & Francis Journals, vol. 14(11), pages 789-793.
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