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Monetary policy and growth with trend inflation and financial frictions

  • Olmos, Lorena
  • Sanso Frago, Marcos

This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.

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File URL: http://mpra.ub.uni-muenchen.de/54606/1/MPRA_paper_54606.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 54606.

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Date of creation: 2014
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Handle: RePEc:pra:mprapa:54606
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