IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

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.

If 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.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Oxford University Press in its journal Oxford Economic Papers.

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

in new window

Handle: RePEc:oup:oxecpp:v:64:y:2012:i:3:p:563-591
Contact details of provider: Postal:
Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK

Fax: 01865 267 985
Web page:

Order Information: Web:

References listed on IDEAS
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.:

as in new window
  1. F. Degraeve, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/482, Ghent University, Faculty of Economics and Business Administration.
  2. Solange Berstein & Rodrigo Fuentes, 2005. "Concentration and Price Rigidity: Evidence for the Deposit Market in Chile," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-22, January-J.
  3. Tovar, Camilo Ernesto, 2009. "DSGE Models and Central Banks," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-31.
  4. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2004. "Inflation dynamics and the cost channel of monetary transmission," CFR Working Papers 04-01, University of Cologne, Centre for Financial Research (CFR).
  5. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1995. "Saving behavior in low- and middle-income developing countries," MPRA Paper 13757, University Library of Munich, Germany.
  6. Beatriz de Blas, 2005. "Performance of Interest Rate Rules under Credit Market Imperfections," Faculty Working Papers 16/05, School of Economics and Business Administration, University of Navarra.
  7. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
  8. Coenen, Günter & Straub, Roland, 2005. "Does government spending crowd in private consumption? Theory and empirical evidence for the euro area," Working Paper Series 0513, European Central Bank.
  9. Joseph Atta-Mensah & Ali Dib, 2003. "Bank Lending, Credit Shocks, and the Transmission of Canadian Monetary Policy," Staff Working Papers 03-9, Bank of Canada.
  10. Masao Ogaki & Jonathan David Ostry & Carmen Reinhart, 1995. "Saving Behavior in Low and Middle-Income Developing Countries; A Comparison," IMF Working Papers 95/3, International Monetary Fund.
  11. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
  12. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
  13. 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.
  14. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
  15. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
  16. Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "Bank behavior, incomplete interest rate pass-through, and the cost channel of monetary policy transmission," Economic Modelling, Elsevier, vol. 26(6), pages 1310-1327, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:oup:oxecpp:v:64:y:2012:i:3:p:563-591. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.