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Monetary Policy and the Financing of Firms

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  • Fiorella De Fiore
  • Pedro Teles
  • Oreste Tristani

Abstract

How should monetary policy respond to changes in financial conditions? We consider a simple model where firms are subject to shocks which may force them to default on their debt. Firms' assets and liabilities are nominal and predetermined. Monetary policy can therefore affect the real value of funds used to finance production. In this model, allowing for inflation volatility in response to aggregate shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates and to engineer some inflation; and the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. (JEL G32, E31, E43, E44, E52)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 4 (October)
Pages: 112-42

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:112-42

Note: DOI: 10.1257/mac.3.4.112
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  1. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 893-910, December.
  2. Lawrence J. Christiano & Roberto Motto, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," Computing in Economics and Finance 2004, Society for Computational Economics 169, Society for Computational Economics.
  3. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Monetary shocks, agency costs, and business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 54(1), pages 1-27, June.
  4. Ester Faia & Tommaso Monacelli, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," Working Papers 279, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  6. Andrew T. Levin & Fabio M. Natalucci & Egon Zakrajsek, 2004. "The magnitude and cyclical behavior of financial market frictions," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-70, Board of Governors of the Federal Reserve System (U.S.).
  7. Timothy Fuerst & Matthias Paustian & Charles Carlstorm, 2009. "Optimal monetary policy in a model with agency costs," 2009 Meeting Papers, Society for Economic Dynamics 667, Society for Economic Dynamics.
  8. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, Springer, vol. 12(3), pages 583-597.
  9. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers, Columbia University, Department of Economics 0809-02, Columbia University, Department of Economics.
  10. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 75-97, January.
  11. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 123(571), pages 906-931, 09.
  12. Ester Faia, 2008. "Optimal Monetary Policy with Credit Augmented Liquidity Cycles," 2008 Meeting Papers 414, Society for Economic Dynamics.
  13. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(2), pages 199-216, March.
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Cited by:
  1. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L’intermédiation financière dans l’analyse macroéconomique : Le défi de la crise," TEPP Research Report, TEPP 2012-02, TEPP.
  2. Waters, George A., 2013. "Quantity rationing of credit and the Phillips curve," Journal of Macroeconomics, Elsevier, Elsevier, vol. 37(C), pages 68-80.
  3. Isabel Marques Gameiro & Carla Soares & João Sousa, 2011. "Monetary policy and financial stability: an open debate," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  4. Filippo Occhino & Andrea Pescatori, 2012. "Leverage, investment, and optimal monetary policy," Working Paper 1238, Federal Reserve Bank of Cleveland.
  5. Pedro Teles & Oreste Tristani & Fiorella De Fiore & Isabel Correia, 2013. "Credit Spreads and the Zero Bound on Interest Rates," 2013 Meeting Papers, Society for Economic Dynamics 1124, Society for Economic Dynamics.

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