IDEAS home Printed from https://ideas.repec.org/p/ecm/nawm04/543.html
   My bibliography  Save this paper

Can Financial Frictions Help Explain the Performance of the US Fed?

Author

Listed:
  • Beatriz de-Blas-Pérez

Abstract

This paper investigates whether the presence of financial frictions can help explain the differences in the variability of output and inflation between the Pre- and the Post-Volcker periods. I use a limited participation model with credit market imperfections, in which financial frictions may alter the stabilization effects of monetary policy, as shown in a previous paper of mine. In this setup, I study the interest rate rule followed by the Federal Reserve Bank in the last 40 years considering the presence of credit market imperfections and allowing for a breakpoint in the monetary policy rule, the degree of financial frictions and shock processes. An interest rate rule is estimated for each of the two identified sub-samples. In the absence of financial frictions, the results confirm the widely recognized change in the conduct of monetary policy by reporting substantially different interest rate rules before and after 1981:2, but fail to assign more weight to inflation stabilization in the second sub-sample. Interestingly, with positive monitoring costs the two calibrated rules are much less different, that is, a far smaller change in policy suffices for stabilization when imperfect credit markets are considered. This may suggest a key role for credit market imperfections in the stabilization effects of monetary policy. When the rule, shocks and monitoring costs are allowed to adjust between sub-samples, the calibration reports interest rate rules that assign more weight to inflation and less to output stabilization after 1981:2. Money demand processes vary between sub-samples, whereas technology innovations remain relatively stable across time, which is consistent with standard literature

Suggested Citation

  • Beatriz de-Blas-Pérez, 2004. "Can Financial Frictions Help Explain the Performance of the US Fed?," Econometric Society 2004 North American Winter Meetings 543, Econometric Society.
  • Handle: RePEc:ecm:nawm04:543
    as

    Download full text from publisher

    File URL: http://idea.uab.es/~mdeblas/capitulo2.pdf
    File Function: main text
    Download Restriction: no

    More about this item

    Keywords

    credit market imperfections; monetary policy rules; limited participation;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:543. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.