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The Balance Sheet Channel

In: Financial Stability, Monetary Policy, and Central Banking

  • Ethan Cohen-Cole

    (University of Maryland at College Park)

  • Enrique Martínez-García

    (Federal Reserve Bank of Dallas)

In this paper, we study the role of the credit channel of monetary policy in a synthesis model of the economy. Through the use of a well-specified banking sector and a regulatory capital constraint on lending, we provide an alternate mechanism that can potentially explain the periods of asymmetry in monetary policy without appealing to ad-hoc central bank preferences. This is accomplished through the characterization of the external finance premium that includes bank leverage and systemic risk.

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This chapter was published in: Rodrigo Alfaro (ed.) Financial Stability, Monetary Policy, and Central Banking, , chapter 09, pages 255-297, 2011.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v15c09pp255-297.
Handle: RePEc:chb:bcchsb:v15c09pp255-297
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  19. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
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  24. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Monetary shocks, agency costs, and business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 1-27, June.
  25. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
  26. Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
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  30. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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