Working Paper

Credit market imperfections and the heterogeneous response of firms to monetary shocks

Abstract: This paper assesses the bank-lending channel interpretation of evidence on the heterogeneous response of firms to monetary shocks. To do so I develop a quantitative general equilibrium model of the bank-lending channel with imperfect credit markets. The calibrated model's steady state supports a common identification strategy adopted in the literature: small firms are credit constrained and large firms are not. For some parameter values the model reproduces the cyclical observations viewed as supporting the lending view of the monetary transmission mechanism and for others it does not. The parameter values consistent with the lending view appear to be implausible.

Keywords: Credit; Monetary policy;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series, Macroeconomic Issues

Publication Date: 1998

Number: 96-23