Discussion Paper

No. 2008-33 | November 04, 2008
The “Credit–Cost Channel” of Monetary Policy. A Theoretical Assessment


Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real wages and profits. Moreover, the lack in these models of an explicit role of the credit market in the transmission mechanism is now regarded as a major limitation. Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the “credit-cost channel” of monetary policy. The thrust of the model is that firms’ reliance on bank loans (“credit channel”) may make aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed relationships, with no recourse to non-competitive hypotheses and frictions. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate.

JEL Classification:

C32, E51


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Cite As

Roberto Tamborini (2008). The “Credit–Cost Channel” of Monetary Policy. A Theoretical Assessment. Economics Discussion Papers, No 2008-33, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-33

Comments and Questions

Anonymous - Referee Report
December 16, 2008 - 09:39

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Anonymous - Reader Comment
December 22, 2008 - 10:51

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Anonymous - Reader Comment
December 23, 2008 - 09:43

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Roberto Tamborini - Reply to Referee Report and Reader Comments
January 12, 2009 - 08:37

see attached file