Relationship Lending and the Transmission of Monetary Policy

Repeated interactions allow lenders to uncover private information about their clients, decreas-ing the informational asymmetry between a borrower and his lender but introducing one between the lender and competing \u85nanciers. This paper constructs a credit-based model of production to analyze how learning through lending relationships a¤ects the monetary transmission mecha-nism. I examine how monetary policy changes the incentives of borrowers and lenders to engage in relationship lending and how these changes then shape the response of aggregate output. A central nding is that relationship lending induces a smoother steady state output pro\u85le and a less volatile response to certain monetary shocks. This result provides a theoretical basis for cross-country transmission di¤erences via a relationship lending channel