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Optimal Credit, Monetary, and Fiscal Policy under Occasional Financial Frictions and the Zero Lower Bound

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  • Shifu Jiang

    (Hong Kong Monetary Authority)

Abstract

I study optimal credit, monetary, and fiscal policy under commitment in a model where financial intermediaries face an occasionally binding financial constraint; the monetary authority faces a zero lower bound; and the fiscal authority faces a budget constraint. Financial and productivity shocks can generate a trade-off between inflation stability and financial stability, which is resolved in favor of the latter. As the ZLB prevents full-scale monetary easing and financial distress disrupts the transmission mechanism, monetary policy should be relatively tight in normal times for precautionary reasons. However, monetary policy should be eased in response to large productivity shocks regardless of the sign. The policy based on optimized simple rules features too-aggressive credit interventions and insufficient monetary easing relative to the Ramsey policy.

Suggested Citation

  • Shifu Jiang, 2022. "Optimal Credit, Monetary, and Fiscal Policy under Occasional Financial Frictions and the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 151-197, March.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:1:a:4
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    More about this item

    JEL classification:

    • 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
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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