Bank Behavior and the Cost Channel of Monetary Transmission

Oliver Hülsewig, Eric Mayer and Timo Wollmershäuser

No 1813, CESifo Working Paper Series from CESifo

Abstract: This paper presents a New Keynesian model that dwells on the role of banks in the cost channel of monetary policy. Banks extend loans to firms in an environment of monopolistic competition by setting the loan rate according to a Calvo-type staggered price setting approach, which means that the adjustment of the aggregate loan rate to a monetary policy shock is sticky. We estimate the model for the Euro area by adopting a minimum distance approach. Our findings exhibit that, first, frictions on the loan market influence the propagation of monetary policy shocks as the pass-through of a change in the money market rate to the loan rate is incomplete, and, second, the cost channel is operating, but the effect is weak since inflation is driven by real unit labor costs rather than the loan rate. Our main conclusion is that the strength of the cost channel is mitigated as banks shelter firms from monetary policy shocks by smoothing lending rates.

Keywords: bank behavior; cost channel; minimum distance estimation (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Working Paper: Bank Behaviour and the Cost Channel of Monetary Transmission (2007)
Working Paper: Bank Behavior and the Cost Channel of Monetary Transmission (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1813

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