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Optimal monetary policy in a model of the credit channel

Author:
Fiorella De Fiore  Oreste Tristaniy  


Issue Date:
2008


Abstract(summary):

We consider a simple extension of the basic New-Keynesian setup where... nancial mar- kets are imperfect. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we show that our loglinearized model nests the case with frictionless... nancial mar- kets. A key di¤erence is that marginal costs increase with the output gap but also with the credit spread and the nominal interest rate. Second, we... nd that both technology and... nancial market shocks generate a trade-o¤ between output and in?ation stabilisa- tion. Third, we show that the presence of... nancial market imperfections and endogenous variations in credit spreads can be relevant for the characterization of optimal monetary policy.


Page:
28


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