Earmarked Credit and Monetary Policy Power: micro and macro considerations

Is monetary policy power reduced in the presence of governmental credit with subsidized interest rates, insensitive to the monetary cycle? I argue this question has not yet been reasonably answered even though a virtual consensus seems to have been reached. Using a general analytical decomposition I show that the available microeconometric evidence is not necessarily informative about the macroeconomic effect of interest, due to the presence of general equilibrium effects. Moreover, evidence of decreased power over output does not imply that power over inflation is also decreased. A simple New Keynesian model where fi rms take credit, from both the market and the government, to finance working capital needs is presented to exemplify those possibilities.