Lending Relationships and Monetary Policy

Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy, ()
Additional contact information
Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,: yak-soy@ems.bbk.ac.uk, javier.martinez@brunel.ac.uk, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Authors registered in the RePEc Author Service: Yunus Aksoy and Henrique S. Basso

No 2009:18, Working Paper Series from Uppsala University, Department of Economics

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.

Keywords: Endogenous Banking Spread; Credit Markets; Cost Chanell of Monetary Transmission; Firm-bank Relationships (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-01-21, Revised 2010-01-21
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: LENDING RELATIONSHIPS AND MONETARY POLICY (2013)
Working Paper: Lending Relationships and Monetary Policy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2009_018

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