Bank Lending, Housing and Spreads
Publikation: Working paper › Forskning
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Bank Lending, Housing and Spreads. / Aslam, Aqib; Santoro, Emiliano.
Department of Economics, University of Copenhagen, 2008.Publikation: Working paper › Forskning
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TY - UNPB
T1 - Bank Lending, Housing and Spreads
AU - Aslam, Aqib
AU - Santoro, Emiliano
N1 - JEL classification: E32, E43, E44, E51, E52, E58
PY - 2008
Y1 - 2008
N2 - The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.
AB - The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.
KW - Faculty of Social Sciences
KW - liquidity
KW - collateral constraints
KW - staggered interest rate-setting
KW - credit
M3 - Working paper
BT - Bank Lending, Housing and Spreads
PB - Department of Economics, University of Copenhagen
ER -
ID: 8465263