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Optimal Monetary Policy under Staggered Loan Contracts

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  • Yuki Teranishi

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp))

Abstract

The first aim of the paper is to investigate a new source of economic stickiness, staggered nominal loan interest rate contracts between a private bank and a firm under the monopolistic competition. We introduce this staggered loan contract mechanism with micro-foundation based on agent's optimized behaviors into a standard New Keynesian model in a tractable way. Simulation results show that staggered loan contracts play an important role in determining both the amplitude and the persistence of economic fluctuations. The second aim of the paper is to analyze optimal monetary policy in this environment with staggered loan contracts. To this end, we derive an approximated microfounded-welfare function in the model. Unlike the loss functions derived in other New Keynesian models, this model's welfare function includes a term that measures the first order difference in loan interest rates, which requires reduction of the magnitude of policy interest rate changes in the welfare itself. We derive the optimal monetary policy rule when the central bank can commit to its policy in the timeless perspective. One implication of the optimal policy rule is that the central bank has the incentive to smooth the policy interest rate. This empirically realistic conclusion can be seen in our simulation results.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-08.

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Date of creation: May 2008
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Handle: RePEc:ime:imedps:08-e-08

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Keywords: Staggered Loan Interest Rate Contract; Optimal Monetary Policy; Economic Fluctuation;

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References

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  1. Teruyoshi Kobayashi, 2008. "Incomplete Interest Rate Pass-Through and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 77-118, September.
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Citations

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Cited by:
  1. Andreasen, Martin & Ferman, Marcelo & Zabczyk, Pawel, 2012. "The business cycle implications of banks’ maturity transformation," Bank of England working papers 446, Bank of England.
  2. Ko Munakata & Koji Nakamura & Yuki Teranishi, 2013. "Optimal Macroprudential Policy," CAMA Working Papers 2013-51, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Yunus Aksoy & Henrique S. Basso & Javier Coto-Martinez, 2013. "Lending Relationships And Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 368-393, 01.
  4. Teruyoshi Kobayashi, 2008. "Incomplete Interest Rate Pass-Through and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 77-118, September.
  5. Totzek, Alexander & Wohltmann, Hans-Werner, 2010. "Barro-Gordon revisited: reputational equilibria in a New Keynesian model," Economics Working Papers 2010,04, Christian-Albrechts-University of Kiel, Department of Economics.
  6. Jouchi Nakajima & Yuki Teranishi, 2009. "The Evolution of Loan Rate Stickiness Across the Euro Area," IMES Discussion Paper Series 09-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Fujiwara, Ippei & Teranishi, Yuki, 2011. "Real exchange rate dynamics revisited: A case with financial market imperfections," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1562-1589.
  8. Nao Sudo & Yuki Teranishi, 2008. "Optimal Monetary Policy under Imperfect Financial Integration," IMES Discussion Paper Series 08-E-25, Institute for Monetary and Economic Studies, Bank of Japan.
  9. Airaudo, Marco & Olivero, María Pía, 2014. "Optimal Monetary Policy with Counter-Cyclical Credit Spreads," School of Economics Working Paper Series 2014-1, LeBow College of Business, Drexel University.
  10. Ippei Fujiwara, Yuki Teranishi, 2013. "Financial stability in open economies," AJRC Working Papers 1306, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  11. Scott Davis & Kevin X.D. Huang, 2011. "Optimal monetary policy under financial sector risk," Globalization and Monetary Policy Institute Working Paper 85, Federal Reserve Bank of Dallas.
  12. Ippei Fujiwara & Yuki Teranishi, 2009. "Financial Stability in Open Economies," IMES Discussion Paper Series 09-E-09, Institute for Monetary and Economic Studies, Bank of Japan.

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