Banking and interest rates in monetary policy analysis
Subtitle: a quantitative exploration
By: Marvin Goodfriend, Bennett T. McCallum.
Contributors: McCallum, Bennett T.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13207.; Working paper series (National Bureau of Economic Research) -- working paper no. 13207.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 43
Subjects: Monetary policy -- Econometric models; Banks and banking; Interest rates
Description: 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.
Notes: "June 2007"

Includes bibliographical references (p. 41-43).

Also available in PDF from the NBER world wide web site (www.nber.org).