Bank Behavior and the Cost Channel of Monetary Transmission

46 Pages Posted: 18 Oct 2006

See all articles by Oliver Hülsewig

Oliver Hülsewig

Munich University of Applied Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Timo Wollmershaeuser

Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2006

Abstract

This paper presents a New Keynesian model that dwells on the role of banks in the cost channel of monetary policy. Banks extend loans to firms in an environment of monopolistic competition by setting the loan rate according to a Calvo-type staggered price setting approach, which means that the adjustment of the aggregate loan rate to a monetary policy shock is sticky. We estimate the model for the Euro area by adopting a minimum distance approach. Our findings exhibit that, first, frictions on the loan market influence the propagation of monetary policy shocks as the pass-through of a change in the money market rate to the loan rate is incomplete, and, second, the cost channel is operating, but the effect is weak since inflation is driven by real unit labor costs rather than the loan rate. Our main conclusion is that the strength of the cost channel is mitigated as banks shelter firms from monetary policy shocks by smoothing lending rates.

Keywords: bank behavior, cost channel, minimum distance estimation

JEL Classification: E44, E52, E58

Suggested Citation

Hülsewig, Oliver and Mayer, Eric and Wollmershaeuser, Timo, Bank Behavior and the Cost Channel of Monetary Transmission (September 2006). CESifo Working Paper Series No. 1813, Available at SSRN: https://ssrn.com/abstract=938378 or http://dx.doi.org/10.2139/ssrn.938378

Oliver Hülsewig

Munich University of Applied Sciences ( email )

Munich
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Timo Wollmershaeuser (Contact Author)

Ifo Institute for Economic Research ( email )

Poschingerstrasse 5
Munich, 81879
Germany
+49 89 9224 1406 (Phone)
+49 89 9224 1462 (Fax)

HOME PAGE: http://www.ifo.de/link/wollmershaeuser_t.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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