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    Lending relationships and monetary policy

    Aksoy, Yunus and Basso, H. and Coto-Martinez, J. (2013) Lending relationships and monetary policy. Economic Inquiry 51 (1), pp. 368-393. ISSN 0095-2583.

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    Abstract

    Financial intermediation and bank spreads are the important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are (a) banking spreads move countercyclically generating amplified output responses, (b) spread movements are important for monetary policymaking even when a standard Taylor Rule is employed, (c) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (d) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the Central Bank to react to spread movements.

    Metadata

    Item Type: Article
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Yunus Aksoy
    Date Deposited: 25 Jan 2013 10:52
    Last Modified: 06 Dec 2016 14:49
    URI: http://eprints.bbk.ac.uk/id/eprint/5818

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