IDEAS home Printed from
   My bibliography  Save this paper

Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates


  • Pierre-Richard Agénor
  • Peter J. Montiel


Monetary policy is analyzed in a simple model with credit market imperfections, flexible prices, and a floating exchange rate. Banks’ lending rates incorporate a premium, which depends on firms’ net worth, over the cost of borrowing from the central bank. In contrast to models in the Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing lending rate. The central bank sets the refinance rate and provides banks with unlimited access to liquidity at that rate. The model is used to study the macroeconomic effects of changes in the refinance and reserve requirement rates, central bank auctions, shifts in the risk premium and contract enforcement costs, and changes in public spending and world interest rates.

Suggested Citation

  • Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:87

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 243-270, January.
    2. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2006. "Inflation dynamics and the cost channel of monetary transmission," European Economic Review, Elsevier, vol. 50(4), pages 995-1016, May.
    3. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms," Macroeconomics 0412010, EconWPA.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Camilo E Tovar, 2005. "The mechanics of devaluations and the output response in a DSGE model: how relevant is the balance sheet effect?," BIS Working Papers 192, Bank for International Settlements.
    6. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," The School of Economics Discussion Paper Series 0628, Economics, The University of Manchester.
    7. Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
    8. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
    9. Kumar Das, Pranab, 2004. "Credit rationing and firms' investment and production decisions," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 87-114.
    10. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, April.
    11. Carl E. Walsh, 2002. "Teaching Inflation Targeting: An Analysis for Intermediate Macro," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(4), pages 333-346, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. repec:nbp:nbpbik:v:47:y:2016:i:6:p:395-434 is not listed on IDEAS
    2. Koray Alper, 2008. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 8(2), pages 33-73.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:man:cgbcrp:87. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marianne Sensier). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.