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Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections

  • Pierre-Richard Agenor
  • Koray Alper

This paper analyzes the transmission process of monetary policy in a closed-economy New Keynesian model with monopolistic banking, credit market imperfections, and a cost channel. Lending rates incorporate a risk premium, which depends on firms’ net worth and cyclical output. The supply of bank loans is perfectly elastic at the prevailing bank rate and so is the provision of central bank liquidity at the official policy rate. The model is calibrated for a middle-income country. Numerical simulations show that credit market imperfections and sluggish adjustment of bank deposit rates (rather than lendingrates) may impart a substantial degree of persistence in the response of output and inflation to monetary shocks.

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File URL: http://www.tcmb.gov.tr/wps/wcm/connect/89bbaffa-2f2e-445c-8017-f6f63e8cfa64/WP0906ENG.pdf?MOD=AJPERES&CACHEID=89bbaffa-2f2e-445c-8017-f6f63e8cfa64
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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0906.

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Date of creation: 2009
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Handle: RePEc:tcb:wpaper:0906
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  1. Beatriz de-Blas-Pérez, 2003. "Performance Of Interest Rate Rules Under Credit Market Imperfections," Economics Working Papers we033813, Universidad Carlos III, Departamento de Economía.
  2. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, 2004. "Inflation Dynamics and the Cost Channel of Monetary Transmission," Money Macro and Finance (MMF) Research Group Conference 2004 18, Money Macro and Finance Research Group.
  3. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," IMF Working Papers 05/159, International Monetary Fund.
  4. Ferre De Graeve, 2006. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Computing in Economics and Finance 2006 84, Society for Computational Economics.
  5. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
  6. Benjamin Keen & Yongsheng Wang, 2007. "What is a realistic value for price adjustment costs in New Keynesian models?," Applied Economics Letters, Taylor & Francis Journals, vol. 14(11), pages 789-793.
  7. Joseph Atta-Mensah & Ali Dib, 2003. "Bank Lending, Credit Shocks, and the Transmission of Canadian Monetary Policy," Working Papers 03-9, Bank of Canada.
  8. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
  9. Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "Bank behavior, incomplete interest rate pass-through, and the cost channel of monetary policy transmission," Economic Modelling, Elsevier, vol. 26(6), pages 1310-1327, November.
  10. Tommaso Monacelli & Ester Faia, 2005. "Optimal Interest Rate Rules, Asset Prices and Credit Frictions," Computing in Economics and Finance 2005 452, Society for Computational Economics.
  11. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
  12. Tovar, Camilo Ernesto, 2008. "DSGE Models and Central Banks," Economics Discussion Papers 2008-30, Kiel Institute for the World Economy.
  13. Rodrigo Fuentes & Solange Berstein, 2004. "Concentration and Price Rigidity: Evidence for the deposit Market in Chile," Econometric Society 2004 Latin American Meetings 67, Econometric Society.
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