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Lending Relationships and Monetary Policy
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2009 (English)Report (Other academic)
Abstract [en]

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.

Place, publisher, year, edition, pages
Uppsala: Department of Economics, Uppsala University , 2009. , p. 42
Series
Working paper / Department of Economics, Uppsala University (Online), ISSN 1653-6975 ; 2009:18
Keywords [en]
Endogenous Banking Spread, Credit Markets, Cost Channel of Monetary Transmission, Firm-bank Relationships
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:uu:diva-112801OAI: oai:DiVA.org:uu-112801DiVA, id: diva2:288082
Available from: 2010-01-21 Created: 2010-01-20 Last updated: 2010-01-21Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • ieee
  • modern-language-association
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf