The "Credit-Cost Channel" of Monetary Policy. A Theoretical Assessment

Roberto Tamborini

No 2008-33, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real wages and profits. Moreover, the lack in these models of an explicit role of the credit market in the transmission mechanism is now regarded as a major limitation. Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the "credit-cost channel" of monetary policy. The thrust of the model is that firms' reliance on bank loans ("credit channel") may make aggregate supply sensitive to bank interest rates ("cost channel"), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed relationships, with no recourse to non-competitive hypotheses and frictions. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate.

Keywords: Macroeconomics and monetary economics; monetary transmission mechanisms; credit channel; cost channel (search for similar items in EconPapers)
JEL-codes: C32 E51 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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