Monetary Policy, Credit Markets, and Banks: A DSGE Perspective

Rubio, Margarita

Abstract

The monetary policy transmission mechanism changed after the 2008 crisis. Evidence shows that credit markets and the banking system play now a predominant role in the pass-through of monetary policy to the real economy. This paper examines the monetary transmission mechanism in a Dynamic Stochastic General Equilibrium (DSGE) model that; on the one hand, includes a financial accelerator that operates through collateral constraints in credit markets, and, on the other hand, also presents regulatory constraints on the banking sector. Results show that the financial accelerator effects make monetary policy more effective, in line with the rest of the literature. However, the introduction of banks reduces part of this effectiveness due to regulatory requirements on bank capital, as observed during the crisis time. Furthermore, an optimal monetary policy analysis concludes that when adding all these ingredients into the model, monetary policy should respond more strongly to output and less to inflation than in a standard model new Keynesian model, due to the inclusion of extra distortions that create welfare trade-offs among agents.

Citation

Rubio, M. (2020). Monetary Policy, Credit Markets, and Banks: A DSGE Perspective. Economics Letters, 195, Article 109481. https://doi.org/10.1016/j.econlet.2020.109481

• Journal Article Type: Article
• Acceptance Date: Aug 7, 2020
• Online Publication Date: Aug 21, 2020
• Publication Date: Oct 1, 2020
• Deposit Date: Aug 10, 2020
• Publicly Available Date: Feb 22, 2022
• Journal: Economics Letters
• Print ISSN: 0165-1765
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 195
• Article Number: 109481
• DOI: https://doi.org/10.1016/j.econlet.2020.109481
• Public URL: https://nottingham-repository.worktribe.com/output/4825222
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0165176520302974