Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real...

Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the "credit-cost channel" of monetary policy. The thrust of the model is that firms' reliance on bank loans ("credit channel") may make aggregate supply...