Relationship Lending and the Transmission of Monetary Policy

Kinda Hachem

No 1096, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: This paper demonstrates that the banking notion of relationship lending matters for the transmission of monetary policy. I first construct an asymmetric information model with a continuum of heterogeneous borrowers and the possibility of lender learning through repeated interactions. I then derive the optimal credit contracts in this environment and analyze their implications for aggregate output. A variety of contracts are observed in equilibrium, with sufficiently good borrowers entering into multi-period lending relationships and economies that can sustain these relationships exhibiting a smoother steady state output profile and a more gradual response to certain monetary shocks. The results are consistent with empirical evidence so the model provides a basis for investigating the proportion of cross-country differences in monetary transmission that can be explained by cross-country differences in relationship lending.

Date: 2010
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Journal Article: Relationship lending and the transmission of monetary policy (2011)
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