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Do credit market imperfections justify a central bank׳s response to asset price fluctuations?

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  • Nutahara, Kengo

Abstract

Do credit market imperfections justify a central bank׳s response to asset price fluctuations? This study addresses this question from the perspective of equilibrium determinacy. In the model we use, prices are sticky and the working capital of firms is subject to asset values because of a lack of commitment. If credit market imperfections exist to a small degree, the Taylor principle is a necessary and sufficient condition for equilibrium determinacy, and monetary policy response to asset price fluctuations is good from the perspective of equilibrium determinacy. However, if credit market imperfections exist to a large degree such that the collateral constraint is binding, then the Taylor principle no longer guarantees equilibrium determinacy, and monetary policy response to asset price fluctuations becomes a source of equilibrium indeterminacy. We find that the existence of credit market imperfections makes it unsuitable to initiate a monetary policy response to deal with asset price fluctuations. We also find that reductions in credit market imperfections can enlarge the indeterminacy region of the model parameters.

Suggested Citation

  • Nutahara, Kengo, 2015. "Do credit market imperfections justify a central bank׳s response to asset price fluctuations?," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 81-94.
  • Handle: RePEc:eee:dyncon:v:61:y:2015:i:c:p:81-94
    DOI: 10.1016/j.jedc.2015.09.008
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    Cited by:

    1. Shirai, Daichi, 2016. "Persistence and Amplification of Financial Frictions," MPRA Paper 72187, University Library of Munich, Germany.
    2. repec:eee:dyncon:v:92:y:2018:i:c:p:84-102 is not listed on IDEAS
    3. Kengo Nutahara, 2017. "Asset Prices, Nominal Rigidities, and Monetary Policy: Case of Housing Price," CIGS Working Paper Series 17-001E, The Canon Institute for Global Studies.

    More about this item

    Keywords

    Asset prices; Credit market imperfections; Collateral constraints; Equilibrium indeterminacy; Monetary policy; Taylor principle;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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