The role of bank capital and the transmission mechanism of monetary policy

Pojanart Sunirand

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper is a theoretical study of the transmission mechanism of monetary policy in the presence of an endogenous role of bank capital. The basic framework is a standard Dynamic New Keynesian model with price stickiness modified so as firms as well as banks face endogenous financial frictions in obtaining external funds from their respective debtors. This implies that an external financial premium exists, thereby motivating the endogenous role of entrepreneurial net worth and bank capital in the model. In the terminology of Van den Heuvel (2001), the model exhibits the unconventional ‘bank capital ’ channel of monetary policy. The simulation result highlights a financial accelerator effect in that endogenous evolution of bank capital, together with that of entrepreneurial net worth, operate to amplify and propagate the effect of a monetary shock in the macroeconomy.

Keywords: bank capital; monetary policy; financial accelerator effect (search for similar items in EconPapers)
JEL-codes: E30 E44 E50 G21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2002-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://eprints.lse.ac.uk/24953/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24953

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager (lseresearchonline@lse.ac.uk).