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Institute of Economics

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  7. New BERG Working Paper No. 158 by Naira Kotb and Christian R. Proa?o published!

New BERG Working Paper No. 158 by Naira Kotb and Christian R. Proa?o published!

In the BERG Working Paper Series Naira Kotb and Christian R. Proa?o have published a new paper entitled ?Capital-Constrained Loan Creation, Stock Markets and Monetary Policy in a Behavioral New Keynesian Model“.

A complete overview of all BERG Working Papers published so far can be found here.

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Abstract

In this paper we incorporate a stock market and a banking sector in a behavioral macro- finance model with heterogenous and boundedly rational expectations. Households’ sav- ings are diversified among bank deposits and stock purchases, and banks’ lending to firms is subject to capital-related costs. We find that households’ participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the trans- mission of monetary policy to the economy significantly, and that households’ deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against- the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability.