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Credit Frictions and Optimal Monetary Policy

Listed author(s):
  • Cúrdia, Vasco
  • Woodford, Michael

The basic (representative-household) New Keynesian model of the monetary transmission mechanism is extended to allow for a spread between the interest rate available to savers and borrowers, and investigate the consequences of a variable credit spread for the effects of a variety of shocks, and for optimal policy responses to those shocks. A simple target criterion continues to provide a good approximation to optimal policy. Such a “flexible inflation target” can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393216301052
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 84 (2016)
Issue (Month): C ()
Pages: 30-65

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Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:30-65
DOI: 10.1016/j.jmoneco.2016.10.003
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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