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Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections

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  • Pierre-Richard Agenor
  • Koray Alper

Abstract

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.

Suggested Citation

  • Pierre-Richard Agenor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Working Papers 0906, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:0906
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    3. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    4. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    5. Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez-Palenzuela, 2011. "Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 49-113, December.
    6. Agénor, Pierre-Richard & Pereira da Silva, Luiz A., 2014. "Macroprudential regulation and the monetary transmission mechanism," Journal of Financial Stability, Elsevier, vol. 13(C), pages 44-63.
    7. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    8. Agénor, Pierre-Richard & Pereira da Silva, Luiz A., 2012. "Cyclical effects of bank capital requirements with imperfect credit markets," Journal of Financial Stability, Elsevier, vol. 8(1), pages 43-56.
    9. Giacomo Carboni & Christoffer Kok & Matthieu Darrak Paries, 2014. "Exploring the Nexus Between Macro-Prudential Policies and Monetary Policy Measures: Evidence from an Estimated DSGE Model for the Euro Area," Working Papers BFI_2013-005, Becker Friedman Institute for Research In Economics.
    10. Pengfei Jia & King Yoong Lim, 2021. "The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(1), pages 103-125, February.
    11. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series 267, Central Bank of Brazil, Research Department.
    12. Ebru Yüksel & Kıvılcım Metin Özcan, 2013. "Interest rate pass-through in Turkey and impact of global financial crisis: asymmetric threshold cointegration analysis," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(1), pages 98-113, February.
    13. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2012. "Capital requirements and business cycles with credit market imperfections," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 687-705.
    14. Murota, Ryu-ichiro, 2019. "Negative interest rate policy in a permanent liquidity trap," MPRA Paper 93498, University Library of Munich, Germany.
    15. Primus, Keyra, 2013. "Excess Reserves, Monetary Policy and Financial Volatility," MPRA Paper 51670, University Library of Munich, Germany.
    16. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    17. Keyra Primus, 2013. "'Excess Reserves, Monetary Policy and Financial Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 183, Economics, The University of Manchester.
    18. Leighton Vaughan Williams & Chunping Liu & Hannah Gerrard, 2019. "How well do Elo-based ratings predict professional tennis matches?," NBS Discussion Papers in Economics 2019/03, Economics, Nottingham Business School, Nottingham Trent University.
    19. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    20. Agénor, Pierre-Richard & Zilberman, Roy, 2015. "Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 301-315.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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