The "Credit-Cost Channel" of Monetary Policy. A Theoretical Assessment
25 Pages Posted: 18 Dec 2010
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The "Credit-Cost Channel" of Monetary Policy. A Theoretical Assessment
Date Written: 2009
Abstract
Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the "credit-cost channel" of monetary policy. The thrust of the model is that firms' reliance on bank loans ("credit channel") may make aggregate supply sensitive to bank interest rates ("cost channel"), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed stylized effects of monetary policy, with no recourse to non-competitive hypotheses and frictions in the goods and labour markets. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate. --
Keywords: Macroeconomics and monetary economics, monetary transmission mechanisms, credit channel, cost channel
JEL Classification: C32, E51
Suggested Citation: Suggested Citation
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