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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.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr87.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 87.

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Length: 35 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:man:cgbcrp:87
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  1. Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
  2. 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.
  3. 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.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  5. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
  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. Kumar Das, Pranab, 2004. "Credit rationing and firms' investment and production decisions," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 87-114.
  8. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
  9. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, . "Inflation Dynamics and the Cost Channel of Monetary Transmission," Working Papers 2003_19, Business School - Economics, University of Glasgow, revised Oct 2003.
  10. 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.
  11. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
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