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Credit, Money, Interest, and Prices

Author

Listed:
  • Yuliy Sannikov

    (Princeton University)

  • Saki Bigio

    (UCLA)

Abstract

We develop a monetary theory where monetary policy operates exclusively through the bank-lending channel. Credit demand and deposit creation are dynamically linked. Policy tools affect lending through the provision of reserves and their influence on interbank market rates. A credit crunch causes debt-deflation episode that sends agents to their borrowing constraints. Unemployment increases because firms reduce utilization to avoid the risk of violating borrowing limits. Standard monetary policy has power only if credit is extended. We study the cross-section and aggregate dynamics of credit, monetary aggregates, nominal interest, and prices after several policy experiments.

Suggested Citation

  • Yuliy Sannikov & Saki Bigio, 2016. "Credit, Money, Interest, and Prices," 2016 Meeting Papers 1699, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1699
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    Cited by:

    1. Malamud, Semyon & Schrimpf, Paul, 2018. "An Intermediation-Based Model of Exchange Rates," CEPR Discussion Papers 13182, C.E.P.R. Discussion Papers.

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