Bank Lending, Credit Shocks, and the Transmission of Canadian Monetary Policy

Joseph Atta-Mensah () and Ali Dib ()

Working Papers from Bank of Canada

Abstract: The authors use a dynamic general-equilibrium model to study the role financial frictions play as a transmission mechanism of Canadian monetary policy, and to evaluate the real effects of exogenous credit shocks. Financial frictions, which are modelled as spreads between deposit and loan interest rates, are assumed to depend on economic activity as well as on credit shocks. A general finding is that almost all of the real response to a monetary policy shock comes from the price rigidity and not the credit frictions. Credit shocks, however, do have substantial real effects on macroeconomic variables. Thus, in this model, imperfections in credit markets are responsible only for a small amplification and propagation of the real effects of monetary policy shocks.

Keywords: Financial institutions; Monetary policy framework; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E4 E51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mfd, nep-mon and nep-rmg
Date: 2003
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Journal Article: Bank lending, credit shocks, and the transmission of Canadian monetary policy (2008)
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