Loan commitments and optimal monetary policy
AbstractWith loan commitments negotiated in advance, the use of tight money to restrain nominal spending has asymmetric effects upon different categories of borrowers. This can reduce efficiency, even though aggregate demand is stabilized. This is illustrated in the context of an equilibrium model of financial intermediation with loan commitments, where monetary policy is characterized by a supply curve for reserves on the part of the central bank in an inter-bank market. If demand uncertainty relates primarily to the intensity of demand by each borrower with no difference in the degree of cyclicality of individual borrowers' demands, an inelastic supply of reserves by the central bank is optimal, because it stabilizes aggregate demand and as a result increases average capacity utilization. But if demand uncertainty relates primarily to the number of borrowers rather than to each one's demand for credit, an interest-rate smoothing policy is optimal, because it eliminates inefficient rationing of credit in high-demand states.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 37 (1996)
Issue (Month): 3 (June)
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Web page: http://www.elsevier.com/locate/inca/505566
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- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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