Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212091 
Year of Publication: 
2007
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 33/2007
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact.
Subjects: 
bank capital
bank lending
capital buffers
pro-cyclicality
capital regulation
cost channel
credit channel
loan margins
monetary trade-offs
JEL: 
E51
E52
G21
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-415-2
Document Type: 
Working Paper

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