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The Financial Friction and Optimal Monetary Policy: The Role of Interest Rate

In: Contemporary Research in Accounting and Finance

Author

Listed:
  • Salha Ben Salem

    (University of Monastir)

  • Haykel Hadj Salem

    (University of Monastir)

  • Nadia Mansour

    (University of Sousse
    University of Salamanca)

  • Moez Labidi

    (University of Monastir)

Abstract

This article examines the role of financial frictions on real economic fluctuation and monetary policy transmission. We use a Dynamic Stochastic General Equilibrium (DSGE) model with financial friction and price rigidities. In this model, frictions appear, between the bank and the entrepreneur through the financial accelerator, and between the bank and its creditors through the capital channel. We seek to understand how the monetary authorities limited the effects of financial instability by using the interest rate as the main instrument. The results indicate that the financial shock has an enhancing effect on the financial and macroeconomic variables, especially after the revolution of 2011. Besides, we find that if the central bank of Tunisia introduces the financial stability objective on its reaction function it cannot simultaneously stabilize inflation and credit.

Suggested Citation

  • Salha Ben Salem & Haykel Hadj Salem & Nadia Mansour & Moez Labidi, 2022. "The Financial Friction and Optimal Monetary Policy: The Role of Interest Rate," Springer Books, in: Abdelghani Echchabi & Rihab Grassa & Welcome Sibanda (ed.), Contemporary Research in Accounting and Finance, pages 151-176, Springer.
    • Handle: RePEc:spr:sprchp:978-981-16-8267-4_6
    DOI: 10.1007/978-981-16-8267-4_6
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