Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration
Marvin Goodfriend and
Bennett McCallum
No 13207, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on U.S. data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3 % pa between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro-or-counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% pa. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate.
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: AP EFG ME
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Published as Goodfriend, Marvin & McCallum, Bennett T., 2007. "Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1480-1507, July.
Published as Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and interest rates in monetary policy analysis: a quantitative exploration," Proceedings, Federal Reserve Bank of San Francisco.
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Journal Article: Banking and interest rates in monetary policy analysis: A quantitative exploration (2007)
Journal Article: Banking and interest rates in monetary policy analysis: a quantitative exploration (2007)
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