Stabilization Policy with an Endogenous Commercial Bank

We extend the Carlin and Soskice (2005) 3-equation New Keynesian model by introducing a commercial bank that intermediates between the central bank and borrowers in the non-bank private sector. Commercial bank interest rate setting is explicitly modelled, and the implications for stabilization policy are studied. A surprising but important conclusion is that commercial bank behaviour has little impact on the success of stabilization policy, even when the central bank is ignorant of how the commercial bank behaves