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Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies

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  • Julio A. Carrillo
  • Enrique G. Mendoza
  • Victoria Nuguer
  • Jessica Roldán-Peña

Abstract

Violations of Tinbergen rule and strategic interaction undermine monetary and financial policies in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and too little to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with lower welfare than Cooperative equilibria and the DRR, but still higher than in the ATR and STR regimes.

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  • Julio A. Carrillo & Enrique G. Mendoza & Victoria Nuguer & Jessica Roldán-Peña, 2017. "Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies," NBER Working Papers 23151, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23151
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    3. Millard, Stephen & Rubio, Margarita & Varadi, Alexandra, 2021. "The macroprudential toolkit: effectiveness and interactions," Bank of England working papers 902, Bank of England.
    4. Agur, Itai & Demertzis, Maria, 2019. "Will macroprudential policy counteract monetary policy’s effects on financial stability?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 65-75.
    5. Shigenori Shiratsuka & Nao Sudo & Shingo Watanabe, 2019. "Central Bank Design under a Continued Low Inflation and Interest Rate Environment Summary of the 2019 BOJ-IMES Conference," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 37, pages 1-16, November.
    6. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    7. Lama, Ruy & Medina, Juan Pablo, 2020. "Mundell meets Poole: Managing capital flows with multiple instruments in emerging economies," Journal of International Money and Finance, Elsevier, vol. 109(C).
    8. Thitipat Chansriniyom & Natan P. Epstein & Valeriu Nalban, 2020. "The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model," IMF Working Papers 2020/201, International Monetary Fund.
    9. Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2018. "Financial spillovers, spillbacks, and the scope for international macroprudential policy coordination," BIS Papers, Bank for International Settlements, number 97, June.
    10. Hiebert, Paul & Jaccard, Ivan & Schüler, Yves, 2018. "Contrasting financial and business cycles: Stylized facts and candidate explanations," Journal of Financial Stability, Elsevier, vol. 38(C), pages 72-80.
    11. Rochelle M. Edge & J. Nellie Liang, 2019. "New Financial Stability Governance Structures and Central Banks," Finance and Economics Discussion Series 2019-019, Board of Governors of the Federal Reserve System (U.S.).

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • 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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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