New BERG Working Paper No. 158 by Naira Kotb and Christian R. Proaño published!

In the BERG Working Paper Series Naira Kotb and Christian R. Proaño have published a new paper entitled Capital-Constrained Loan Creation, Stock Markets and Monetary Policy in a Behavioral New Keynesian Model.

A complete overview of all BERG Working Papers published so far can be found here.



In this paper we incorporate a stock market and a banking sector in a behavioral macro- finance model with heterogenous and boundedly rational expectations. Households’ sav- ings are diversified among bank deposits and stock purchases, and banks’ lending to firms is subject to capital-related costs. We find that households’ participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the trans- mission of monetary policy to the economy significantly, and that households’ deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against- the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability.