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Loan production and monetary policy

Author

Listed:
  • LG Deidda
  • J.E. Galdon-Sanchez
  • M. Casares

Abstract

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms Taylor (1993) rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Suggested Citation

  • LG Deidda & J.E. Galdon-Sanchez & M. Casares, 2016. "Loan production and monetary policy," Working Paper CRENoS 201612, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201612
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    Keywords

    external finance; optimal monetary policy; business cycles;
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