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Monetary Policy and the Financing of Firms

Author

Listed:
  • Fiorella De Fiore
  • Pedro Teles
  • Oreste Tristani

Abstract

How should monetary policy respond to changes in financial conditions? We consider a simple model where firms are subject to shocks which may force them to default on their debt. Firms' assets and liabilities are nominal and predetermined. Monetary policy can therefore affect the real value of funds used to finance production. In this model, allowing for inflation volatility in response to aggregate shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates and to engineer some inflation; and the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. (JEL G32, E31, E43, E44, E52)

Suggested Citation

  • Fiorella De Fiore & Pedro Teles & Oreste Tristani, 2011. "Monetary Policy and the Financing of Firms," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 112-142, October.
    • Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:112-42
    Note: DOI: 10.1257/mac.3.4.112
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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