Financial frictions and the strength of monetary transmission

    Authors

    U. Aysun; R. Brady;A. Honig

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    J. Int. Money Finan.

    Keywords

    Monetary transmission; Financial frictions; Bankruptcy costs; Business, Finance

    Abstract

    This paper examines the effect of financial frictions on the strength of the monetary transmission mechanism. Credit channel theory implies that the transmission mechanism of monetary policy should be stronger in countries with high levels of financial frictions, all else equal. The intuition is that in these countries, external finance premiums are more sensitive to firms' financial leverage. By affecting asset prices, therefore, monetary policy has greater impact on external finance premiums and output. We test this theoretical prediction by estimating SVAR models on cross-country data to generate indicators for the strength of monetary transmission. We find a positive relationship between various measures of financial frictions and the strength of monetary transmission, supporting the predictions of credit channel theory. (C) 2012 Elsevier Ltd. All rights reserved.

    Journal Title

    Journal of International Money and Finance

    Volume

    32

    Publication Date

    1-1-2013

    Document Type

    Article

    Language

    English

    First Page

    1097

    Last Page

    1119

    WOS Identifier

    WOS:000209350000052

    ISSN

    0261-5606

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