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Optimal Macroprudential Policy

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  • Ko Munakata
  • Koji Nakamura
  • Yuki Teranishi

Abstract

We introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-51.

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Length: 6 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-51

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Keywords: Optimal macroprudential policy; optimal monetary policy; financial market friction;

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  1. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 16(1), pages 26-60, January.
  2. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research, National Bank of Belgium 146, National Bank of Belgium.
  3. Pau Rabanal & Dominic Quint, 2013. "Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area," 2013 Meeting Papers, Society for Economic Dynamics 604, Society for Economic Dynamics.
  4. Claudio Borio, 2011. "Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward," BIS Working Papers 354, Bank for International Settlements.
  5. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 3(2), pages 130-62, April.
  6. Yuki Teranishi, 2008. "Optimal Monetary Policy under Staggered Loan Contracts," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 08-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 944-963, September.
  8. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1215, Cowles Foundation for Research in Economics, Yale University.
  9. Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," IMF Working Papers, International Monetary Fund 09/251, International Monetary Fund.
  10. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  11. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2533-2570, December.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
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