Bank Lending, Housing and Spreads

Aqib Aslam () and Emiliano Santoro ()

No 08-27, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.

Keywords: bank lending; housing; liquidity; credit; staggered interest rate-setting; collateral constraints (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 E51 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac, nep-mon and nep-ure
Date: 2008-05, Revised 2008-11
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