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The role of bank capital and the transmission mechanism of monetary policy

Sunirand, Pojanart (2002) The role of bank capital and the transmission mechanism of monetary policy. Discussion paper, 433. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 433

Abstract

This paper is a theoretical study of the transmission mechanism of monetary policy in the presence of an endogenous role of bank capital. The basic framework is a standard Dynamic New Keynesian model with price stickiness modified so as firms as well as banks face endogenous financial frictions in obtaining external funds from their respective debtors. This implies that an external financial premium exists, thereby motivating the endogenous role of entrepreneurial net worth and bank capital in the model. In the terminology of Van den Heuvel (2001), the model exhibits the unconventional ‘bank capital ’ channel of monetary policy. The simulation result highlights a financial accelerator effect in that endogenous evolution of bank capital, together with that of entrepreneurial net worth, operate to amplify and propagate the effect of a monetary shock in the macroeconomy.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2002 The Author
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 20 Aug 2009 16:00
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/24953

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