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Loan Production And Monetary Policy

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  • Casares, Miguel
  • Deidda, Luca
  • Galdon-Sanchez, Jose E.

Abstract

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms a Taylor-type rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Suggested Citation

  • Casares, Miguel & Deidda, Luca & Galdon-Sanchez, Jose E., 2019. "Loan Production And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 23(1), pages 101-143, January.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:01:p:101-143_00
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    References listed on IDEAS

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