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Performance of Interest Rate Rules under Credit Market Imperfections

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  • Beatriz de Blas

    ()
    (School of Economics and Business Administration, University of Navarra)

Abstract

The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for productivity shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to productivity shocks.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random437a056c22796/1132586205_wp1605.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 16/05.

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Length: 32 pages pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:una:unccee:wp1605

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Web page: http://www.unav.es/facultad/econom

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Keywords: financial frictions; Taylor rules; limited participation; stabilization policy.;

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Cited by:
  1. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 154, Economics, The Univeristy of Manchester.
  2. de Blas Beatriz, 2009. "Can Financial Frictions Help Explain the Performance of the U.S. Fed?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-30, June.

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