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Finance and Credit in a Model of Monetary Policy

Author

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  • Jagjit Chadha

    ()

  • Young-Kwan Kang

Abstract

Economies is the extent to which a workhorse advanced economy model can yield important insights for monetary policy-making. We note that the standard sticky-price, monopolistically competitive model does not allow analysis of money and credit dynamics and led to a concentration of research on simple interest rate reaction functions. Time-varying financial frictions tend to act as a tax on intermediation activities and so can vary output in a significant manner. In this paper, we consider the implications of financial frictions for baseline monetary policy using a model calibrated on Indian data and find that a simple interest rate reaction function may not be welfare maximising.

Suggested Citation

  • Jagjit Chadha & Young-Kwan Kang, 2016. "Finance and Credit in a Model of Monetary Policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 471, National Institute of Economic and Social Research.
  • Handle: RePEc:nsr:niesrd:471
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    File URL: http://www.niesr.ac.uk/sites/default/files/publications/DP471.pdf
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    References listed on IDEAS

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    1. Jagjit S. Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The ties that bind: monetary policy and government debt management," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 548-581, AUTUMN.
    2. Madhusudan Mohanty & Kumar Rishabh, 2016. "Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis?," BIS Working Papers 546, Bank for International Settlements.
    3. Ashima Goyal, 2014. "History of Monetary Policy in India Since Independence," SpringerBriefs in Economics, Springer, edition 127, number 978-81-322-1961-3, February.
    4. Chakraborty Suparna & Otsu Keisuke, 2013. "Business cycle accounting of the BRIC economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-33, September.
    5. Ahmed, Shahid, 2012. "Book Review: The Oxford Handbook of the Indian Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 47(2), pages 311-314.
    6. Gill Hammond & Ravi Kanbur & Eswar Prasad, 2009. "Monetary Policy Challenges for Emerging Market Economies," Chapters,in: Monetary Policy Frameworks for Emerging Markets, chapter 1 Edward Elgar Publishing.
    7. Chadha, Jagjit S. & Corrado, Luisa, 2012. "Macro-prudential policy on liquidity: What does a DSGE model tell us?," Journal of Economics and Business, Elsevier, vol. 64(1), pages 37-62.
    8. Chakravarty, Satya R. & Pal, Rupayan, 2013. "Financial inclusion in India: An axiomatic approach," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 813-837.
    9. repec:bla:manchs:v:81:y:2013:i:s2:p:43-64 is not listed on IDEAS
    10. Francis Breedon & Jagjit S. Chadha & Alex Waters, 2012. "The financial market impact of UK quantitative easing," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 702-728, WINTER.
    11. Jagjit S. Chadha & James Warren, 2013. "Accounting For The Great Recession In The Uk: Real Business Cycles And Financial Frictions," Manchester School, University of Manchester, vol. 81(s2), pages 43-64, October.
    12. Jagjit S Chadha & Luisa Corrado & Jack Meaning, 2012. "Reserves, liquidity and money: an assessment of balance sheet policies," BIS Papers chapters,in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 294-347 Bank for International Settlements.
    13. Goodfriend, Marvin & McCallum, Bennett T., 2007. "Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1480-1507, July.
    14. Calomiris, Charles W. & Larrain, Mauricio & Liberti, José & Sturgess, Jason, 2017. "How collateral laws shape lending and sectoral activity," Journal of Financial Economics, Elsevier, vol. 123(1), pages 163-188.
    15. Ghate, Chetan (ed.), 2012. "The Oxford Handbook of the Indian Economy," OUP Catalogue, Oxford University Press, number 9780199734580.
    16. Chadha, Jagjit S. & Corrado, Luisa & Sun, Qi, 2010. "Money and liquidity effects: Separating demand from supply," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1732-1747, September.
    17. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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    More about this item

    Keywords

    DSGE models; financial frictions; monetary and fiscal policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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