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Monetary Policy and the Financing of Firms

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  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa, and Centre for Economic Policy Research)

  • Oreste Tristani

    (European Central Bank)

  • Fiorella De Fiore

    (European Central Bank)

Abstract

How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms need internal and external funds to produce and they fail if they are not able to repay their debts. Both internal funds and firm debt are nominal assets and are predetermined. Monetary policy can affect the real value of total funds available for production, as well as the real value of debt that needs to be repaid. Furthermore, policy also affects the loan and deposit rates. We find that price stability is not optimal; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones; that the lower bound for the nominal interest rate plays a key role.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 633.

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Date of creation: 2009
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Handle: RePEc:red:sed009:633

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References

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  1. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series 1043, European Central Bank.
  2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  3. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper Series 0326, European Central Bank.
  4. Timothy Fuerst & Matthias Paustian & Charles Carlstorm, 2009. "Optimal monetary policy in a model with agency costs," 2009 Meeting Papers 667, Society for Economic Dynamics.
  5. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
  6. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  7. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  8. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Monetary shocks, agency costs, and business cycles," Working Paper 0011, Federal Reserve Bank of Cleveland.
  9. Andrew T. Levin & Fabio M. Natalucci & Egon Zakrajsek, 2004. "The magnitude and cyclical behavior of financial market frictions," Finance and Economics Discussion Series 2004-70, Board of Governors of the Federal Reserve System (U.S.).
  10. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
  11. Faia, Ester & Monacelli, Tommaso, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," CEPR Discussion Papers 4880, C.E.P.R. Discussion Papers.
  12. Ester Faia, 2008. "Optimal Monetary Policy with Credit Augmented Liquidity Cycles," 2008 Meeting Papers 414, Society for Economic Dynamics.
  13. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
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Cited by:
  1. Pedro Teles & Oreste Tristani & Fiorella De Fiore & Isabel Correia, 2013. "Credit Spreads and the Zero Bound on Interest Rates," 2013 Meeting Papers 1124, Society for Economic Dynamics.
  2. Filippo Occhino & Andrea Pescatori, 2012. "Leverage, investment, and optimal monetary policy," Working Paper 1238, Federal Reserve Bank of Cleveland.
  3. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : Le défi de la crise," Working Papers halshs-00744047, HAL.
  4. Isabel Marques Gameiro & Carla Soares & João Sousa, 2011. "Monetary policy and financial stability: an open debate," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Waters, George A., 2013. "Quantity rationing of credit and the Phillips curve," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 68-80.

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