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Banks, Capital Markets, and the Monetary Transmission Mechanism

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  • Dimsdale, Nicholas

Abstract

This paper reviews the recent literature on bank behavior and the transmission process of monetary policy. It examines the implications of asymmetric information for the credit market and the capital market and discusses the macroeconomic significance of these results. In models with imperfect information net worth is found to play a key role in generating macroeconomic fluctuations and in the monetary transmission process. The special characteristics of banks are discussed and also the conditions required for the presence of a distinct credit channel for monetary policy. Empirical evidence on the importance of the new theories is briefly reviewed including an evaluation of the role of capital market imperfections in investment and consumption and the differential impact of monetary policy on small and large firms. The lessons to be drawn from these theoretical and empirical results for the conduct of monetary policy are briefly outlined. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Dimsdale, Nicholas, 1994. "Banks, Capital Markets, and the Monetary Transmission Mechanism," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 10(4), pages 34-48, Winter.
    • Handle: RePEc:oup:oxford:v:10:y:1994:i:4:p:34-48
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    Cited by:

    1. G.J. De Bondt, 1999. "Credit channels in Europe: a cross-country investigation," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 52(210), pages 295-326.
    2. Rajeswari Sengupta & Harsh Vardhan & Akhilesh Verma, 2024. "Bank capital and monetary policy transmission: Analyzing the central bank's dilemma in the Indian context," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2024-019, Indira Gandhi Institute of Development Research, Mumbai, India.

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