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Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search

Author

Listed:
  • Junichi Fujimoto

    (National Graduate Institute for Policy Studies)

  • Ko Munakata

    (Bank of Japan)

  • Koji Nakamura

    (Bank of Japan)

  • Yuki Teranishi

    (Keio University)

Abstract

To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social wel- fare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macropru- dential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces ex- cessive variations in lending and contributes to both financial and price stabilities.

Suggested Citation

  • Junichi Fujimoto & Ko Munakata & Koji Nakamura & Yuki Teranishi, 2017. "Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search," GRIPS Discussion Papers 16-30, National Graduate Institute for Policy Studies.
    • Handle: RePEc:ngi:dpaper:16-30
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    References listed on IDEAS

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