Sectoral comovement, monetary policy and the credit channel

Federico Di Pace and Christoph Görtz

No 925, Bank of England working papers from Bank of England

Abstract: Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and non-durable and services sticky, does not generate the empirically observed sectoral comovement across expenditure categories in response to a monetary policy shock. We show that introducing financial frictions in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only comovement, but also a rise in credit spreads and a deterioration in bank equity.

Keywords: Financial intermediation; sectoral comovement; monetary policy; financial frictions; credit spreads (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021-06-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... e-credit-channel.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0925

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().