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Credit expansion in a monetary policy game: Implications of the valuation haircut framework

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  • Spyromitros, Eleftherios
  • Tsintzos, Panagiotis

Abstract

In this study, we build on the traditional monetary policy game framework of institutional design to formalize the linkage among credit expansion, inflation expectations, and inflation. We show that the optimal monetary response of the central bank implies an optimal level of credit expansion that minimizes central bank losses. Moreover, central bank conservativeness may affect the optimal level of credit expansion. Assuming that credit expansion is a function that captures the effect of the valuation haircut framework of the central bank, we offer some insights into the complexity of interactions and the possible effects on the real economy.

Suggested Citation

  • Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2019. "Credit expansion in a monetary policy game: Implications of the valuation haircut framework," Finance Research Letters, Elsevier, vol. 28(C), pages 125-129.
    • Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:125-129
    DOI: 10.1016/j.frl.2018.04.012
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    1. Zhi, Bangdong & Wang, Xiaojun & Xu, Fangming, 2022. "Managing inventory financing in a volatile market: A novel data-driven copula model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 165(C).

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    More about this item

    Keywords

    Credit expansion; Monetary policy game; Valuation haircut framework;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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