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Lending Relationships and Monetary Policy

Yunus Aksoy (), Henrique Basso () and Javier Coto-Martinez
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Javier Coto-Martinez: Department of Economics, Mathematics & Statistics, Birkbeck

No 912, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2009-10
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http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0912a.pdf First version, 2009 (application/pdf)

Related works:
Journal Article: LENDING RELATIONSHIPS AND MONETARY POLICY (2013) Downloads
Working Paper: Lending Relationships and Monetary Policy (2010) Downloads
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