Working Paper No. 7
By Spencer Dale and Andy Haldane
Bernanke and Blinder (1988), by relaxing the assumption of perfect bank credit/bond substitutability, identified an independent credit multiplier for monetary policy, in addition to the conventional ISILM monetary multiplier. Imperfect substitutability was thus shown unambiguously to increase the leverage of monetary policy. Here we consider an alternative characterisation of imperfect substitutability, deriving from the well-documented 'specialness' of bank lending. This results in bank loan rates becoming partially insulated from the effects of monetary policy - hence reducing the leverage of monetary policy.
A Simple Model of Money, Credit and Aggregate Demand