Traditional macroeconomic models without financial intermediation describe the transmission mechanism of monetary policy through a single (risk-free) interest rate. As indicated by Meltzer and Nelson 1 , the characterisation of the financial sector in such a simplified manner is likely to miss important elements in the macroeconomic adjustment mechanisms. A key aspect that is absent from the traditional framework is an account of how different interest rates embody time-varying risk premia. Developments in money and credit may be informative as regards the evolution of the (unobservable) risk premia, both for the bank and for the non-financial private sector
