The credit channel of monetary transmission in a small open economy

Jui-Chuan Chang

International Economic Journal, 2008, vol. 22, issue 2, 215-230

Abstract: This paper studies the credit channel of monetary transmission in a small open economy. We develop a simple general equilibrium model by extending Bernanke and Blinder's (1988) CC-LM framework and Edwards and Vegh's (1997) banking specification. Under a floating exchange rate regime and with imperfect capital mobility, we establish that bank-lending behavior may amplify, neutralize or attenuate the impact of monetary policy on output, price and the nominal exchange rate as compared to the standard interest rate channel. An important explanatory factor is the sensitivity of banks and firms to loans and market interest rates. This examination is important to consider in light of the standard AD-AS model at the policy-making level, and in light of recent empirical evidence regarding the credit channel as an important element of the monetary transmission mechanism.

Keywords: credit channel; monetary transmission; open economy (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/10168730802079938

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