“The Quantitative Effects of Bank Lending” by Iris CLAUS
The purpose of this paper is to assess the quantitative importance of the bank lending channel in a small open economy with a floating exchange rate. The framework of the analysis is a general equilibrium model with microeconomic foundations, where agents' decisions are derived from optimising behaviour. A theoretical model with costly financial intermediation is developed and calibrated for New Zealand. The steady states with and without the bank lending channel are derived and the dynamic properties of the model are assessed. The quantitative effects of the bank lending channel are small. This suggests that the degree to which firms borrow from financial intermediaries (banks) or public debt markets is unlikely to affect economic growth.