Research Discussion Papers, Bank of Finland
No 33/2007:
The lending channel under optimal choice of monetary policy
Juha Kilponen ()
and Alistair Milne ()
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.
Keywords: bank capital; bank lending; capital buffers; pro-cyclicality; capital regulation; cost channel; credit channel; loan margins; monetary trade-offs; (follow links to similar papers)
JEL-Codes: E51; E52; G21; (follow links to similar papers)
39 pages, December 15, 2007
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