The Balance Sheet Channel
34 Pages Posted: 9 Dec 2013
Date Written: December 8, 2013
In this paper, we study the role of the credit channel of monetary policy in the context of a DSGE model. Through the use of a regulated banking sector subject to a regulatory capital constraint on lending, we provide alternative interpretations that can potentially explain differences in the implementation of monetary policy without appealing to ad-hoc central bank preferences. This is accomplished through the characterization of the external finance premium as a function of bank leverage and systemic aggregate risk.
Keywords: Balance Sheet, External Finance Premium, Financial Accelerator
JEL Classification: E52, E58, G18, G28
Suggested Citation: Suggested Citation