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Optimal Monetary Policy under Staggered Loan Contracts

  • Yuki Teranishi

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi

The first aim of the paper is to investigate a new source of economic stickiness, staggered nominal loan interest rate contracts between a private bank and a firm under the monopolistic competition. We introduce this staggered loan contract mechanism with micro-foundation based on agent's optimized behaviors into a standard New Keynesian model in a tractable way. Simulation results show that staggered loan contracts play an important role in determining both the amplitude and the persistence of economic fluctuations. The second aim of the paper is to analyze optimal monetary policy in this environment with staggered loan contracts. To this end, we derive an approximated microfounded-welfare function in the model. Unlike the loss functions derived in other New Keynesian models, this model's welfare function includes a term that measures the first order difference in loan interest rates, which requires reduction of the magnitude of policy interest rate changes in the welfare itself. We derive the optimal monetary policy rule when the central bank can commit to its policy in the timeless perspective. One implication of the optimal policy rule is that the central bank has the incentive to smooth the policy interest rate. This empirically realistic conclusion can be seen in our simulation results.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-08.

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Date of creation: May 2008
Date of revision:
Handle: RePEc:ime:imedps:08-e-08
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