Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Monetary Policy with Credit Augmented Liquidity Cycles

Contents:

Author Info

  • Ester Faia

    (University of Rome at Tor Vergata)

Abstract

The optimal response of monetary policy to financial instability is a long standing question whose policy relevance is now emphasized by the increase in available liquidity and in firms’ financial exposure. Bernanke, Gertler and Gilchrist (1998) build a model in which credit frictions occur on the demand for capital investment and induce demand driven fluctuations which exacerbate shock transmission. In this context the policy maker does not face any trade-off as output stabilization is achieved through inflation targeting. I build a sticky price DSGE model in which the demand for working capital is affected both by a cost channel and an external finance premium. In this context the policy instrument affects the cost of collateralizable loans which in turn affects firms’ marginal cost and inflation dynamics (supply side driven fluctuations). The optimal monetary policy design is based upon both constrained and global Ramsey policies. Results show that: a) the optimal inflation level lies between zero and the one prescribed by the Friedman rule, b) the optimal dynamic path features deviations from price stability, c) the optimal rule features asset price targeting.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economicdynamics.org/meetpapers/2008/paper_414.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 414.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:414

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(5), pages 1600-1621, May.
  2. Adao, Bernardino & Correia, Maria Isabel Horta & Teles, Pedro, 2001. "Gaps and Triangles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2668, C.E.P.R. Discussion Papers.
  3. Tommaso Monacelli & Ester Faia, 2005. "Optimal Interest Rate Rules, Asset Prices and Credit Frictions," Computing in Economics and Finance 2005, Society for Computational Economics 452, Society for Computational Economics.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. De Fiore, Fiorella & Teles, Pedro & Tristani, Oreste, 2009. "Monetary Policy and the Financing of Firms," Working Paper Series, European Central Bank 1123, European Central Bank.
  2. Tillmann, Peter, 2009. "The time-varying cost channel of monetary transmission," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(6), pages 941-953, October.
  3. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series, European Central Bank 1043, European Central Bank.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed008:414. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.