Credit Markets and the Propagation of Monetary Policy Shocks

loaned to entrepreneurs with respect to the capital they obtain with those units
of account. In other words, from (5) we have that

P = ~e-------i----7---L----   --------?.

_E max [0, k (a, z) - a] λ (da × dz)

The total supply of units of account is determined from the balance sheet of com-
mercial banks,

(1^-1) H = L⁺B,

where we have used (3) to substitute for deposits in equilibrium. That is, total
units of account serve to finance either the use of capital by entrepreneurs (L) or
government debt (B). On the other hand, the supply of real assets to be used for
capital only depends upon the interest rates R^D and R^L . A proportional increase
in government liabilities (H and B) implies a proportional increase in the supply
of loans which support the same allocation of real assets and the same equilibrium
provided nominal prices increase also proportionally.

We can also see that there is a continuum of stationary equilibria indexed by
the reserve to total government liabilities ratio, the number h, as well as the reserve
requirement ρ. Different values of the pair (h, ρ) are associated with stationary
equilibria with different proportions of government liabilities, different interest
rates, different price levels and different inflations. At one extreme, as ρ goes to 0
and h goes to 1 the model converges to the real economy of Bohacek [5]. Keeping
h = 1, as we increase ρ, we introduce a gap between borrowing and lending rates
and one of the frictions that reduce financial intermediation appears. On the other
hand, keeping ρ constant, as we start decreasing h, the central bank takes nominal
resources from the economy and there are less credits to be used to finance capital
acquisitions. For that to be the case, and in order to convince savers to give their
credits to the central bank, rates must go up. In the limit, when h is 0, we go
to autarchy (in this case, there is no intermediation). Thus, keeping ρ constant,
an increase in h should be associated with a steady state where interest rates are
lower. It turns out that for low values of ρ, such as the one used in the calibration
exercise we conduct, the stationary interest rate is close to the value in Bohacek [5]
for most of the values of h. Below we analyze the transition between these steady
states.

3.2 The occupational choice

In this economy, agents have to make the occupational choice given the interest
rates (R^L, R^D), the real wage (w) and the individual characteristics summarized

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