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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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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
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 433
Date Deposited: 20 Aug 2009 16:00
URL: http://eprints.lse.ac.uk/24953/

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