Goodfriend, Marvin McCallum, Bennett T. Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on US data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3% p.a. between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro- or counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% p.a. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate. Money and banking; External finance premium; Collateral; Interest rates; Equity premium 1995-03-01
    https://kilthub.cmu.edu/articles/journal_contribution/Banking_and_Interest_Rates_in_Monetary_Policy_Analysis_A_Quantitative_Exploration/6704093
10.1184/R1/6704093.v1