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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.

The “Credit-Cost Channel” of Monetary Policy. A Theoretical Assessment