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Household credit and the monetary transmission mechanism


  • Victor E. Li


This paper evaluates the importance of household credit in the transmission of monetary policy and in explaining the positive correlation between money and credit services over the business cycle. It does so in the context of a general equilibrium framework of cash and household credit with two distinguishing features. There is an explicit financial sector with firms specializing in the production of credit services. Second, the financial sector also contains financial intermediaries who provide interest bearing accounts for households and loanable funds to credit producers. It is shown that monetary injections in this set-up can generate a liquidity effect which positively influences the availability of household credit services and real activity. Furthermore, the model predicts that monetary injections actually lower the real cost of consumption, thus resolving a difficulty with recent liquidity effect models. The potential quantitative importance of this monetary transmission mechanism is analyzed.

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  • Victor E. Li, 1998. "Household credit and the monetary transmission mechanism," Working Papers 1998-019, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1998-019

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    References listed on IDEAS

    1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    2. Michael D. Boldin, 1993. "Econometric analysis of the recent downturn in housing construction: was it a credit-crunch?," Research Paper 9332, Federal Reserve Bank of New York.
    3. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-748, September.
    4. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    5. John V. Duca, 1995. "Credit availability, bank consumer lending, and consumer durables," Working Papers 9514, Federal Reserve Bank of Dallas.
    6. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    7. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-1136, November.
    8. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-353, May.
    9. Thomas F. Cooley & Gary D. Hansen, 1991. "The welfare costs of moderate inflations," Proceedings, Federal Reserve Bank of Cleveland, pages 483-518.
    10. Sangkyun Park, 1993. "The determinants of consumer installment credit," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-38.
    11. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
    12. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
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    Housing ; Housing - Finance;


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