Kalin Nikolov

Financial Frictions and the Monetary Transmission Mechanism: Theory, Evidence and Policy Implications

This paper provides a brief survey of the role of financial frictions in the monetary transmission mechanism. After noting some of the key stylised facts that any model of the transmission mechanisms must be consistent with, we discuss both the classical interest rate channel and the credit and bank lending channels of monetary transmission. We then review the empirical evidence relating to the relative importance of these channels. Finally we consider what impact the presence of significant financial frictions might have on the conduct of monetary policy JEL Classification: E52, E58, E44

Capital Regulation in a Macroeconomic Model with Three Layers of Default

We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This “3D model” shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.

Inflation, Money Demand and Portfolio Choice

investigate the predicted responses of portfolio choices in response to inflation changes for the wealthier part of the population that hold most of the nominal stocks.