Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates

Pierre-Richard Agénor and Peter Montiel

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper develops a simple static model with credit market imperfections and flexible prices for monetary policy analysis in a fixed-exchange rate economy. Lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself depends on firms' net worth. In the basic framework, banks' funding sources are perfect substitutes and the provision of liquidity by the central bank is perfectly elastic at the prevailing refinance rate. The model is used to perform a variety of experiments, such as changes in the refinance and reserve requirement rates, central bank auctions, shifts in the premium and contract enforcement costs, and changes in public spending and world interest rates. The analysis is then extended to examine credit targeting and sterilization policies.

Pages: 47 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (12)

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Working Paper: Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:76

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