im27 - Chapter 27 Information Problems and Channels for...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 27 Information Problems and Channels for Monetary Policy Overview In the previous chapters the impact of monetary policy was examined through the market for money. This chapter picks up on the discussion from Chapters 11 and 12 in which it was argued that, because of information problems, bank loans may not be perfect substitutes for other types of credit. If this argument is true, the ability or willingness of banks to lend may affect economic activity, and bank credit plays an important role in the way in which monetary policy will affect output. The key point is made that markets for finance differ from simple auction markets in that financial institutions provide risk-sharing, liquidity, and information services to savers and borrowers. The material in this chapter is important for students to understand because it provides an extension to the role that banks play in the economic system, particularly with respect to the impact of monetary policy. The instructor can illustrate in class the importance of bank lending to the economy using some of the many stories in the financial press concerning the credit crunches of the 1990s and 2000–2001. The chapter spends considerable time comparing and contrasting the money channel and the bank lending and balance sheet channels of the short-run impact of changes in the money supply on output and interest rates. (The AD-AS framework developed in earlier chapters is used to carry out the analysis.) In the money channel an expansionary monetary policy’s impact is felt largely through changes in the interest rate in the money market. In the bank lending channel an expansionary monetary policy is also perceived as increasing the availability of bank loans, which allows bank-dependent sectors of the economy—such as households and small firms—to increase their spending. The balance sheet channel stresses the importance of the effect of the financial net worth of households and firms on their willingness to spend. An expansionary monetary policy will lower interest rates and raise stock prices, thereby increasing the value of liquid financial assets, leading to increased spending on consumer durable goods and investment goods. The liquidity of households and firms may also increase as falling interest rates reduce the cost of servicing existing debts. The evidence in favor of the bank lending and balance sheet channels is reviewed. Particularly interesting is the fact that, during periods when the Fed contracts the level of bank reserves, those borrowers who are able to switch exhibit a tendency to switch to nonbank sources of finance— principally the commercial paper market. Outline I. Macroeconomic Costs of Information Problems A) Information problems in lending can create obstacles for borrowers who need external financing. B)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/11/2011 for the course ECON 304 taught by Professor Sanchez during the Fall '11 term at NMSU.

Page1 / 6

im27 - Chapter 27 Information Problems and Channels for...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online