Banking competition, collateral constraints and optimal monetary policy
AbstractWe analyze optimal monetary policy in a model with two distinct financial frictions. First, borrowing is subject to collateral constraints. Second, credit flows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: inflation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both financial and non-financial shocks, the optimal monetary policy commitment implies a short-run trade-off between stabilization goals. Such policy tradeoffs become amplified as banking competition increases, due to the fall in lending spreads and the resulting increase in financial leveraging.
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1001.
Length: 45 pages
Date of creation: Feb 2010
Date of revision:
banking competition; lending spreads; collateral constraints; monetary policy; linear-quadratic method;
Other versions of this item:
- Javier Andrés & Óscar Arce & Carlos Thomas, 2013. "Banking Competition, Collateral Constraints, and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 87-125, December.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-27 (All new papers)
- NEP-BAN-2010-02-27 (Banking)
- NEP-BEC-2010-02-27 (Business Economics)
- NEP-CBA-2010-02-27 (Central Banking)
- NEP-MAC-2010-02-27 (Macroeconomics)
- NEP-MON-2010-02-27 (Monetary Economics)
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