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Performance of interest rate rules under credit market imperfections

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  • de Blas, Beatriz

Abstract

The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules on output. However, these effects are reversed relative to new Keynesian models: under limited participation, interest rate rules are stabilizing for productivity shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to productivity shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 3 (May)
Pages: 586-596

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:3:p:586-596

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Financial frictions Taylor rules Limited participation Stabilization policy;

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Cited by:
  1. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 154, Economics, The Univeristy of Manchester.
  2. de Blas Beatriz, 2009. "Can Financial Frictions Help Explain the Performance of the U.S. Fed?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-30, June.
  3. Pierre-Richard Agénor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 120, Economics, The Univeristy of Manchester.

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