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Working paper

Asymmetric Information, Financial Intermediation and the Monetary Transmission Mechanism: A Critical Review (WP 03/19)

Issue date: 
Monday, 1 September 2003
Status: 
Current
View point: 
Publication category: 
JEL classification: 
E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General

Abstract

Macroeconomic models currently used by policy makers generally assume that the workings of financial markets can be fully summarised by financial prices, because the Modigliani and Miller (1958) theorem holds. This paper argues that these models are too limited in describing how monetary policy (and other) shocks are transmitted to the economy and points to new directions. The models are too limited because they disregard an information asymmetry between borrowers and lenders and the importance of financial intermediaries not only for individual depositors but the economy as a whole. Incorporating financial market interactions into macroeconomic models will enhance the understanding of the transmission mechanisms of monetary policy and other shocks.

Acknowledgements

We would like to thank Bob Buckle, John Creedy, Stephen Burnell, Khoon Goh, Leo Krippner, Brendon Riches and Christie Smith for valuable comments on (earlier drafts of) this paper.

Disclaimer

The views expressed in this Working Paper are those of the author(s) and do not necessarily reflect the views of the New Zealand Treasury.  The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Last updated: 
Wednesday, 24 October 2007