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Monetary Policy and the Financing of Firms

Author Info

  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa, and Centre for Economic Policy Research)

  • Oreste Tristani

    (European Central Bank)

  • Fiorella De Fiore

    (European Central Bank)

Abstract

How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms need internal and external funds to produce and they fail if they are not able to repay their debts. Both internal funds and firm debt are nominal assets and are predetermined. Monetary policy can affect the real value of total funds available for production, as well as the real value of debt that needs to be repaid. Furthermore, policy also affects the loan and deposit rates. We find that price stability is not optimal; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones; that the lower bound for the nominal interest rate plays a key role.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 633.

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Date of creation: 2009
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Handle: RePEc:red:sed009:633
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Find related papers by JEL classification:
  • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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  1. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2010. "Optimal Monetary Policy in a Model with Agency Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 37-70, 09.
  2. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  3. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper 0318, Federal Reserve Bank of Cleveland.
  4. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  5. Faia, Ester & Monacelli, Tommaso, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," CEPR Discussion Papers 4880, C.E.P.R. Discussion Papers.
  6. Andrew T. Levin & Fabio M. Natalucci, 2005. "The Magnitude and Cyclical Behavior of Financial Market Frictions," 2005 Meeting Papers 443, Society for Economic Dynamics.
  7. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  8. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, vol. 123(571), pages 906-931, 09.
  9. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  10. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Monetary shocks, agency costs, and business cycles," Working Paper 0011, Federal Reserve Bank of Cleveland.
  11. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
  12. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  13. Ester Faia, 2008. "Optimal Monetary Policy with Credit Augmented Liquidity Cycles," 2008 Meeting Papers 414, Society for Economic Dynamics.
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Cited by:

  1. Thepthida Sopraseuth & Eleni Iliopulos, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
  2. Pedro Teles & Oreste Tristani & Fiorella De Fiore & Isabel Correia, 2013. "Credit Spreads and the Zero Bound on Interest Rates," 2013 Meeting Papers 1124, Society for Economic Dynamics.
  3. Filippo Occhino & Andrea Pescatori, 2012. "Leverage, investment, and optimal monetary policy," Working Paper 1238, Federal Reserve Bank of Cleveland.
  4. Waters, George A., 2013. "Quantity rationing of credit and the Phillips curve," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 68-80.
  5. Isabel Marques Gameiro & Carla Soares & João Sousa, 2011. "Monetary policy and financial stability: an open debate," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  6. Schabert, Andreas, 2014. "Optimal monetary policy, asset purchases, and credit market frictions," Working Paper Series 1738, European Central Bank.
  7. Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2014. "Kiss me deadly: From Finnish great depression to great recession," Research Discussion Papers 24/2014, Bank of Finland.

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