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Performance Of Interest Rate Rules Under Credit Market Imperfections

  • Beatriz de-Blas-Pérez


The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for technology shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to technology shocks.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we033813.

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Date of creation: Jul 2003
Date of revision:
Handle: RePEc:cte:werepe:we033813
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