Financial Intermediation And Macroeconomic Analysis

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Financial Intermediation and Macroeconomic Analysis Michael Woodford

Submitted by:

Muhammad Shahzad (73537) Sahampathi Weerasuriya (73416)

Submitted to:
Prof. Dr. Georg Stadtmann

February 28, 2017

Europa Universität Viadrina
Frankfurt (Oder) Table of Contents
Introduction 2
Housing prices and aggregate demand 3
Banking and money supply 4
Model of bank landing channels 5
Credit and economic activity: A market based approach 8
Determination of the Supply of intermediation 11
The IS-MP model with Credit Frictions 12
Consequences of the shift of supply intermediation 13
Implication of Monitory Policy 13
Liquidity Trap and Unconventional monetary policy 14
Role of Unconventional Monetary policy 15
Monetary Policy and …show more content…

The role of financial intermediary is changing with time. The recent financial crisis of 2007-2009 shed the light on changing role of financial intermediaries and rising demand of non-bank financial intermediaries, which grew out of the securitization of assets and the integration of banking with capital market development. The recent financial crisis not only effected the economy like US but it also left profound influence on the global market as a whole. Banking sector and financial market are inseparable when we talk about market based financial system. In conventional bank lending channel, reserve was the legal binding for many banks but due to sizeable reduction in …show more content…

The significance of the role of the banks for the transmission of monetary policy prior to the financial crisis has been ignored. Central banks didn’t include the banking sector during the formation of macroeconomic models before the crisis of 2007-2010. Per different economic analysts, there were couple of reasons to not pay attention on the significance role of commercial banks for the transmission of monetary policy before the crisis. Firstly, it was technically difficult to model the role of financial intermediaries in macroeconomic model. Second, under most economic conditions, the role of financial intermediaries was not relevant. Moving Further, in the traditional credit channels, due to imperfect situation between bank’s lending and bonds, monetary policy may have a stronger impact on economic activity via bank loan supply restrictions. Bernanke and Gertler (1995), in their article of the credit channel of monetary policy transmission, conventional bank lending channel of monetary policy has been divided into two main branches, narrow and broad respectively. The narrow channel focuses on the financial frictions deriving from the balance-sheet situation of banks. Banks are forced to reduce their loan portfolio due to a decline in total reserve able bank deposits, if the monetary policy is tightened. On the other hand, the broad credit channel also considers

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