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LENDING RELATIONSHIPS AND MONETARY POLICY
Author(s) -
AKSOY YUNUS,
BASSO HENRIQUE S.,
COTOMARTINEZ JAVIER
Publication year - 2013
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2012.00453.x
Subject(s) - economics , monetary policy , intermediation , output gap , financial intermediary , monetary economics , taylor rule , indeterminacy (philosophy) , business cycle , inflation (cosmology) , general equilibrium theory , dynamic stochastic general equilibrium , new keynesian economics , inflation targeting , macroeconomics , central bank , physics , quantum mechanics , theoretical physics
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)