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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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  24. Stephen G. Cecchetti & Lianfa Li, 2008. "Do Capital Adequacy Requirements Matter For Monetary Policy?," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 643-659, October.
  25. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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  27. Brinkmann, Emile J & Horvitz, Paul M, 1995. "Risk-Based Capital Standards and the Credit Crunch," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 848-63, August.
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