Financial Shocks and Optimal Policy
Preprint
- 1 March 2010
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
This paper incorporates banks as well as frictions in the market for bank capital into a standard New Keynesian model and considers the positive and normative implications of various financial shocks. It shows that the frictions matter significantly for the effects of the shocks and the properties of optimal monetary and fiscal policy. For instance, for shocks that increase banks' demand for liquidity, optimal monetary policy accepts an output contraction while it would not in the absence of the frictions (or under suitably conducted fiscal policy). We find that optimal monetary policy can be approximated by a simple interest-rate rule targeting inflation; and it also allows large adjustments in the money supply, a property reminiscent of Poole's analysis.This publication has 48 references indexed in Scilit:
- Credit Frictions and Optimal Monetary PolicyPublished by National Bureau of Economic Research ,2015
- Credit and Banking in a DSGE Model of the Euro AreaSSRN Electronic Journal, 2010
- Conventional and Unconventional Monetary PolicyPublished by Federal Reserve Bank of St. Louis ,2010
- Credit Spreads and Monetary PolicyPublished by National Bureau of Economic Research ,2009
- Banking Competition, Housing Prices and Macroeconomic StabilitySSRN Electronic Journal, 2009
- Monetary Aggregates and Liquidity in a Neo‐Wicksellian FrameworkJournal of Money, Credit and Banking, 2008
- Optimal Fiscal and Monetary Policy: Equivalence ResultsJournal of Political Economy, 2008
- The Cost of Nominal Rigidity in NNS ModelsJournal of Money, Credit and Banking, 2007
- Optimal Fiscal and Monetary Policy: Some Recent ResultsJournal of Money, Credit and Banking, 1991
- Staggered prices in a utility-maximizing frameworkJournal of Monetary Economics, 1983