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INTRODUCTION
The news from Europe is scarcely getting better. The decision by the European Central Bank (ECB) in September 2014 to provide further support to stimulate lending in the Eurozone, following earlier such attempts by the ECB to ease the sovereign debt crisis, is further indication of the central bank's concern that real economic activity remains weak. Although, the unemployment rate in the Eurozone is down slightly from its peak at 12% reached in September 2013, it remains, as this is written, well-above levels experienced since the euro was introduced. Germany, the economic powerhouse of the Eurozone economy in recent years, is forecast to slow down to 1.3% in 2015, according to the December 2014 Economist Poll of Forecasters down from earlier forecasts that were more optimistic. (http://www.economist.com/news/economic-and-financial-indicators/21635492-economist-poll-forecasters-december-averages) Real GDP growth in the other major Eurozone economies of France, Italy, and Spain is even lower with forecasts of below 1% through 2015. It is worth adding that real GDP growth forecasts in recent years have tended to be on the optimistic side. As growth forecasts are perilously close to negative territory, with little indication that policymakers will loosen fiscal policy in the foreseeable future, there is added burden on monetary policy to deliver the Eurozone from its low growth predicament.
The 'global financial crisis' (GFC) of 2008-2009 has reminded the profession about the connection between credit conditions, financial stability, and economic performance that were previously forgotten but have now become an integral part of central bank thinking in the past few years. As a result, policymakers are now more aware than ever of the importance of understanding the links between credit market conditions and real economic activity.
Until recently, the notion that there were frictions in the financial system that would hamper the monetary transmission mechanism was dismissed as unnecessary in empirical macromodels. Now, however, policymakers and academics are searching for ways to quantify the extent to which these frictions can impact aggregate economic outcomes. This has led to considerable research of late across the globe. One example the demonstrates the importance central banks attach to the role of the financial sectors in macroeconomic outcomes is ECB's Macro-prudential Research Network (MaRs; https://www.ecb.europa.eu/home/html/researcher_mars.en.html).
The purpose of this paper is to describe a simple model to investigate...