Bank Behaviour and the Cost Channel of Monetary Transmission

Eric Mayer, Oliver Hülsewig and Timo Wollmershäuser
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Oliver Hülsewig: Ifo Institute, Munich
Timo Wollmershäuser: Ifo Institute, Munich
Authors registered in the RePEc Author Service: Oliver Hülsewig and Timo Wollmershäuser

No 98, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: This paper provides a micro-foundation of the behavior of the banking industry in a Stochastic Dynamic General Equilibrium model of the New Keynesian style. The role of banks is reduced to the supply of loans to ¯rms that must pay the wage bill before they receive revenues from sell- ing their products. This leads to the so-called cost channel of monetary policy transmission. Our model is based on the existence of a bank{client relationship which provides a rationale for monopolistic competition in the loan market. Using a Calvo-type staggered price setting approach, banks decide on their loan supply in the light of expectations about the future course of monetary policy, implying that the adjustment of loan rates to a monetary policy shock is sticky. This is in contrast to Ravenna and Walsh (2006) who focus primarily on banks operating under perfect competition, which means that the loan rate always equals the money market rate. The structural parameters of our model are determined using a minimum distance estimation, which matches the theoretical impulse responses to the empirical responses of an estimated VAR for the euro zone to a monetary policy shock

Keywords: New Keynesian Model; monetary policy transmission; bank behavior; cost channel; minimum distance estimation (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Bank Behavior and the Cost Channel of Monetary Transmission (2006)
Working Paper: Bank Behavior and the Cost Channel of Monetary Transmission (2006)
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