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The balance sheet channel

  • Ethan Cohen-Cole
  • Enrique Martinez-Garcia

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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Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU08-7.

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Date of creation: 2008
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Handle: RePEc:fip:fedbqu:qau08-7
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