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Review of Economics

Jahrbuch für Wirtschaftswissenschaften

Editor-in-Chief: Berlemann, Michael

Ed. by Haucap, Justus / Thum, Marcel

3 Issues per year

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2366-035X
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Money and Credit in the New Keynesian Model

Sven Offick
  • Department of Economics, Christian-Albrechts-University Kiel, Olshausenstr. 40, 24098 Kiel, Germany. Phone: ++49-431-880-1472
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/ Hans-Werner Wohltmann
  • Department of Economics, Christian-Albrechts-University Kiel, Olshausenstr. 40, 24098 Kiel, Germany. Phone: ++49-431-880-1447
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Published Online: 2016-02-11 | DOI: https://doi.org/10.1515/roe-2014-0304

Abstract

This paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household’s utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank’s instrument variables are the monetary base and the refinancing rate, i. e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to BERNANKE and BLINDER (1988) - the credit channel may also dampen the output effects of monetary disturbances. The expansionary effects of a monetary expansion may be substantially diminished if the monetary disturbance is accompanied by a contractionary credit shock. In a dynamic version of our model, in which expectations are formed endogenously, we find that the credit channel amplifies output responses.

Keywords: Money; Loan; Money-and-credit-in-the-utility; Credit channel; New Keynesian model; Monetary policy

About the article

Published Online: 2016-02-11

Published in Print: 2014-12-01


Citation Information: Review of Economics, ISSN (Online) 2366-035X, ISSN (Print) 0948-5139, DOI: https://doi.org/10.1515/roe-2014-0304.

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© 2014 by Lucius & Lucius, Stuttgart.

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