Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82560
Authors: 
Aksoy, Yunus
Basso, Henrique S.
Coto-Martinez, Javier
Year of Publication: 
2009
Series/Report no.: 
Working Paper, Department of Economics, Uppsala University 2009:18
Abstract: 
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.
Subjects: 
Endogenous Banking Spread
Credit Markets
Cost Channel of Monetary Transmission
Firm-bank Relationships
JEL: 
E44
E52
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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