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Sectoral comovement, monetary policy and the credit channel

Federico Di Pace and Christoph Görtz ()

No 925, Bank of England working papers from Bank of England

Abstract: Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and non-durable and services sticky, does not generate the empirically observed sectoral comovement across expenditure categories in response to a monetary policy shock. We show that introducing financial frictions in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only comovement, but also a rise in credit spreads and a deterioration in bank equity.

Keywords: Financial intermediation; sectoral comovement; monetary policy; financial frictions; credit spreads (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021-06-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0925

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