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Performance of Interest Rate Rules under Credit Market Imperfections

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  • Beatriz de Blas

    (School of Economics and Business Administration, University of Navarra)

Abstract

The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for productivity shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to productivity shocks.

Suggested Citation

  • Beatriz de Blas, 2005. "Performance of Interest Rate Rules under Credit Market Imperfections," Faculty Working Papers 16/05, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp1605
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    References listed on IDEAS

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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