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Loan commitments and optimal monetary policy

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  • John V. Duca
  • David D. VanHoose

Abstract

This paper analyzes how increased reliance on floating rate loan commitments by firms affects the optimal interest-rate-conditioned monetary policy. The analysis uses a stylized Poole-type IS-LM structure that explicitly integrates the interaction between credit and goods markets. By endogenizing the choice between traditional loans and floating-rate commitments, the model can analyze interaction between central bank monetary policy decisions and the choice of loan contract types. A key implication is that, when this joint decision problem is taken into account, the separation between the monetary and goods sectors assumed in the standard IS-LM paradigm breaks down. Copyright 1990 by Ohio State University Press.
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Suggested Citation

  • John V. Duca & David D. VanHoose, 1988. "Loan commitments and optimal monetary policy," Finance and Economics Discussion Series 44, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:44
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    Cited by:

    1. Anjan V. Thakor, 2002. "Banking stability, reputational rents, and the stock market: should bank regulators care about stock prices?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    2. Perera, Anil & Ralston, Deborah & Wickramanayake, J., 2014. "Impact of off-balance sheet banking on the bank lending channel of monetary transmission: Evidence from South Asia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 195-216.
    3. Eirik Gaard Kristiansen, 2005. "Strategic bank monitoring and firms’ debt structure," Working Paper 2005/10, Norges Bank.

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