The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on U.S. data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3 % pa between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro-or-counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% pa. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate.
|Statement||Marvin Goodfriend, Bennett T. McCallum.|
|Series||NBER working paper series -- no. 13207., Working paper series (National Bureau of Economic Research) -- working paper no. 13207.|
|Contributions||McCallum, Bennett T., National Bureau of Economic Research.|
|The Physical Object|
|Pagination||43 p. :|
|Number of Pages||43|
Journal of Monetary Economics Vol Issue 5, July , Pages Banking and interest rates in monetary policy analysis: A quantitative exploration ☆Cited by: In this book you will find not only a unified treatment of the theoretical foundations of monetary policy, optimal policy inertia, indicator variables for optimal policy, monetary policy in a world without money, fiscal requirements for price stability, optimal rules for setting interest rates, and much more, but also practical details of. Marvin Goodfriend & Bennett T. McCallum, "Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration," NBER Working Papers . Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy. The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies.
This paper studies the e˛ect of low interest rates on ˙nancial intermediation and the transmission of monetary policy. Using U.S. bank- and branch-level data, I document two new facts: ˙rst, the long-run decline in bond rates has not been fully passed through to loan rates; second, the short-run pass-through of policy rates to loan rates is. Figure 1. Monetary Policy and Interest Rates. The original equilibrium occurs at E expansionary monetary policy will shift the supply of loanable funds to the right from the original supply curve (S 0) to the new supply curve (S 1) and to a new equilibrium of E 1, reducing the interest rate from 8% to 6%.A contractionary monetary policy will shift the supply of loanable funds to the left. The finding revealed that almost all the variables, with the exception of bank savings rate, exhibit a strong sign of co-moving in the long run with the tendency of converging. The research revealed that there exist unidirectional causality between monetary policy rate and bank lending rate; bank lending rate and bank savings rate. With the goals and frameworks for macroeconomic analysis in mind, the final step is to discuss the two main categories of macroeconomic policy: monetary policy, which focuses on money, banking and interest rates; and fiscal policy, which focuses on government spending, taxes, and borrowing.
Theoretically, the effectiveness of monetary policy on the economy through the banking or credit channel transmission depends on (1) the responsiveness of market interest rate, especially banks lending rate, and loan supply to a change in monetary policy (Kashyap et al., , Zwick, ) and (2) the responsiveness of firms' investment to. This book presents an introduction to central banking and monetary policy. We, the public, accept the following as money (M) (that is, the means of payments / medium of exchange): notes and coins (N&C) and bank deposits (BD). Interest rates affect the banking sector. When interest rates rise, the profitability of the banking sector increases. Fundamental Analysis Portfolio Management "Conducting Monetary Policy. Interest rates are a key part of a nation's monetary policy. Monetary policy is shaped and set by a government administration, and executed through its central bank (in the U.S., that's the.