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This article extends the analytical framework proposed by Agénor and Montiel [2006, 2007, 2008 a] for studying the implications of credit market imperfections for the transmission mechanism of monetary policy in middle-income countries, where banks play a key role in financing economic activity. At the heart of this mechanism is the interplay between the cost channel and the impact of borrowers’ net worth on the risk premium. The first part provides a description of the model. The second describes its solution, analytically and graphically. In the third part, the model is used to study the impact of an increase in the Central bank’s refinance rate and reserve requirement rates. Classification JEL: E44, E51, F41.