Financial Development and the Asymmetry of Monetary Policy

30 Pages Posted: 11 Apr 2006

See all articles by Luis Carranza

Luis Carranza

University of Navarra

Jose E. Galdon-Sanchez

Universidad Publica de Navarra ; IZA

Javier Gómez Biscarri

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: April 3, 2006

Abstract

In this paper we develop a simple model of the relationship between financial market development and investment by entrepreneurs in the presence of a Central Bank. The model analyzes how the level of financial development affects the way credit spreads, and therefore the volume of credit and output, react to monetary policy actions. We show that in countries where financial markets are poorly developed, lending rates may react in an asymmetric manner to monetary expansions and contractions; i.e. monetary contractions generate a larger impact on credit than expansions. Other implications of the model are in line with those in the literature. Cross-country empirical evidence for this asymmetry is obtained from a large panel dataset.

Keywords: Financial Markets, Investment, Asymmetry of Response of Credit, Lending Rates

JEL Classification: E44, E52

Suggested Citation

Carranza, Luis and Galdon-Sanchez, Jose E. and Gómez Biscarri, Javier, Financial Development and the Asymmetry of Monetary Policy (April 3, 2006). Available at SSRN: https://ssrn.com/abstract=895163 or http://dx.doi.org/10.2139/ssrn.895163

Luis Carranza

University of Navarra ( email )

School of Business and Economics
Campus Universitario
Pamplona 31080, Navarra
Spain
+34948425625 (Phone)
+34948425626 (Fax)

Jose E. Galdon-Sanchez (Contact Author)

Universidad Publica de Navarra ( email )

Department of Economics
Campus de Arrosadia
Pamplona, Navarra 31006
Spain
+34 948 16 9338 (Phone)
+34 948 16 97 21 (Fax)

HOME PAGE: http://www.econ.unavarra.es/~galdon/

IZA

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=1494

Javier Gómez Biscarri

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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