Aksoy, Yunus, Basso, Henrique S. and Coto-Martinez, Javier (2013) Lending relationships and monetary policy. Economic Inquiry, Vol.51 (No.1). pp. 368-393. doi:10.1111/j.1465-7295.2012.00453.x ISSN 0095-2583.

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Abstract

Financial intermediation and bank spreads are the 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 (a) banking spreads move countercyclically generating amplified output responses, (b) spread movements are important for monetary policymaking even when a standard Taylor Rule is employed, (c) 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 (d) 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. (JEL E44, E52, G21)

Item Type:	Journal Article
Divisions:	Faculty of Social Sciences > Economics
Journal or Publication Title:	Economic Inquiry
Publisher:	Wiley-Blackwell Publishing, Inc.
ISSN:	0095-2583
Official Date:	January 2013
Dates:	Date Event January 2013 Published
Volume:	Vol.51
Number:	No.1
Page Range:	pp. 368-393
DOI:	10.1111/j.1465-7295.2012.00453.x
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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