On Monetary Policy Implications of Credit Rationing under Asymmetric Information

Frederique Bracoud ()

No 2000/10, Keele Department of Economics Discussion Papers (1995-2001) from Department of Economics, Keele University

Abstract: This paper analyses the monetary policy transmission mechanisms through the banking sector. Banks are assumed to compete a la Bertrand in a loan market characterized by adverse selection. Stiglitz and Weiss' (1981) set-up is extended to introduce leakages of reserves from the banking system, compulsory reserves, and loans from the central bank. The paper shows that the banks' re- serves management strategy is totally subordinated to the dictates of competition in the loan market. This generates some unusual results. For instance, if the central bank increases the legal reserve requirement, the banks' reserve ratio may decrease. In addition, the paper confirms that when credit is rationed, monetary policy is transmitted through quantities. Nevertheless, in spite of a rigid credit rate, some price adjustment transmission mechanism does actually occur under credit rationing since the deposit rate reacts.

Keywords: Banking; Bertrand competition; Credit channel; Monetary policytransmission; Adverse selection; Credit rationing (search for similar items in EconPapers)
Pages: 31 pages
Date: 2000, Revised 2001-02
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