The Balance-Sheet Transmission Channel of Monetary Policy: The Cases of Germany and Spain (original) (raw)

In this paper, the role of the financial position of private agents in the transmission of monetary pollcy (the balance-sheet channel) is explored. To the extent that official interest rates are able to affect the market value and the income flows of certain categories of financial instruments and that these changes in financial wealth and interest income have an effect on aggregate expenditure , output and prices, supplementary transmission mechanisms arise in addition to those related to the substitution between current and future (or between domestic and foreign) demand. However, the pass-through from official interest rates to market rates and asset prices and the sensitivity of demand to wealth and interest income are not dealt with in the current exercise. By focusing mainly on analysing the financial position of private agents in two countries (Germany and Spain), the scope is substantially more limited. Evidence provided points towards relatively small differences in the potential extent of the balance-sheet channel in both countries , although its potency seems to be larger in the case of Germany, particularly as far as non-financial enterprises are concerned.

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