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Bank Lending, Credit Shocks, and the Transmission of Canadian Monetary Policy

Author

Listed:
  • Joseph Atta-Mensah
  • Ali Dib

Abstract

The authors use a dynamic general-equilibrium model to study the role financial frictions play as a transmission mechanism of Canadian monetary policy, and to evaluate the real effects of exogenous credit shocks. Financial frictions, which are modelled as spreads between deposit and loan interest rates, are assumed to depend on economic activity as well as on credit shocks. A general finding is that almost all of the real response to a monetary policy shock comes from the price rigidity and not the credit frictions. Credit shocks, however, do have substantial real effects on macroeconomic variables. Thus, in this model, imperfections in credit markets are responsible only for a small amplification and propagation of the real effects of monetary policy shocks.

Suggested Citation

  • 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.
  • Handle: RePEc:bca:bocawp:03-9
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial institutions; Monetary policy framework; Transmission of monetary policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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