Hostname: page-component-cc8bf7c57-7lvjp Total loading time: 0 Render date: 2024-12-11T23:02:29.309Z Has data issue: false hasContentIssue false
  • English
  • Français

LIQUIDITY SHOCKS, EQUITY-MARKET FRICTIONS, AND OPTIMAL POLICY

Published online by Cambridge University Press:  26 February 2014

Harris Dellas ,
Behzad Diba  and
Olivier Loisel
Harris Dellas
Affiliation:
University of Bern
Behzad Diba
Affiliation:
Georgetown University
Olivier Loisel*
Affiliation:
CREST (ENSAE)
*
Address correspondence to: Olivier Loisel, ENSAE, Timbre J120, 3 Avenue Pierre Larousse, 92245 Malakoff Cédex, France; e-mail: [email protected]; URL: http://www.cepremap.fr/membres/olivier.loisel.
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we study the positive and normative implications of financial shocks in a standard New Keynesian model that includes banks and frictions in the market for bank capital. We show how such frictions influence materially the effects of bank liquidity shocks and the properties of optimal policy. In particular, they limit the scope for countercyclical monetary policy in the face of these shocks. A fiscal policy instrument can complement monetary policy by offsetting the balance-sheet effects of these shocks, and jointly optimal policies attain the same equilibrium that monetary policy (alone) could attain in the absence of equity-market frictions.

Keywords

Financial ShocksRamsey Optimal Monetary and Fiscal PolicyBanks
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1195 - 1219
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barth, Marvin J. III and Ramey, Valerie A. (2001) The cost channel of monetary transmission. In Bernanke, Ben S. and Rogoff, Kenneth (eds.), NBER Macroeconomic Annual, pp. 199–239. Cambridge, MA: MIT Press.Google Scholar
Chari, V.V., Lawrence, J. Christiano and Kehoe, Patrick J. (1991) Optimal fiscal and monetary policy: Some recent results. Journal of Money, Credit and Banking 23, 519–539.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.CrossRefGoogle Scholar
Christiano, Lawrence J., Trabandt, Mathias, and Walentin, Karl (2010) DSGE models for monetary policy analysis. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 285–367. Amsterdam: Elsevier North-Holland.Google Scholar
Collard, Fabrice and Dellas, Harris (2005) Poole in the New Keynesian model. European Economic Review 49 (4), 887–907.CrossRefGoogle Scholar
Collard, Fabrice, Dellas, Harris, Diba, Behzad, and Loisel, Olivier (2012) Optimal Monetary and Prudential Policies. Bank of France working paper 413.CrossRefGoogle Scholar
Correia, Isabel, Juan Pablo Nicolini, and Pedro Teles (2008) Optimal fiscal and monetary policy: Equivalence results. Journal of Political Economy 116 (1), 141–170.CrossRefGoogle Scholar
Fernández-Villaverde, Jesús (2010) Fiscal policy in a model with financial frictions. American Economic Review, Papers and Proceedings 100 (2), 35–40.CrossRefGoogle Scholar
Gerali, Andrea, Neri, Stefano, Sessa, Luca, and Signoretti, Federico M. (2010) Credit and banking in a DSGE model of the Euro area. Journal of Money, Credit and Banking 42 (S1), 107–141.CrossRefGoogle Scholar
Gertler, Mark and Karadi, Peter (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58 (1), 17–34.CrossRefGoogle Scholar
Gertler, Mark and Kiyotaki, Nobuhiro (2010) Financial intermediation and credit policy in business cycle analysis. In Friedman, Benjamin and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 547–599. Amsterdam: Elsevier North-Holland.Google Scholar
Gertler, Mark, Kiyotaki, Nobuhiro, and Queralto, Albert (2012) Financial crises, bank risk exposure, and government financial policy. Journal of Monetary Economics 59 (S), S17–34.CrossRefGoogle Scholar
Hobijn, Bart and Ravenna, Federico (2010) Loan Securitization and the Monetary Transmission Mechanism. Mimeo, Federal Reserve Bank of San Francisco, University of California–Santa Cruz, and HEC Montréal.Google Scholar
Jermann, Urban and Vincenzo Quadrini (2009) Financial Innovations and Macroeconomic Volatility. Mimeo, Wharton School of the University of Pennsylvania and University of Southern California.Google Scholar
Jermann, Urban and Vincenzo Quadrini (2012) Macroeconomic effects of financial shocks. American Economic Review 102 (1), 238–271.CrossRefGoogle Scholar
Khan, Aubhik, King, Robert G., and Wolman, Alexander L. (2003) Optimal monetary policy. Review of Economic Studies 70, 825–860.CrossRefGoogle Scholar
Kiyotaki, Nobuhiro and John Moore (1997) Credit cycles. Journal of Political Economy 105 (2), 211–248.CrossRefGoogle Scholar
Levin, Andrew and López-Salido, David (2004) Optimal Monetary Policy with Endogenous Capital Accumulation. Mimeo, Federal Reserve Board.Google Scholar
Lintner, John (1956) Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review 46, 97–113.Google Scholar
Lucas, Robert E. Jr. (2003) Macroeconomic priorities. American Economic Review 93 (1), 1–14.CrossRefGoogle Scholar
Lucas, Robert E. Jr. and Stokey, Nancy (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12 (1), 55–93.CrossRefGoogle Scholar
Meh, Césaire A. and Moran, Kevin (2010) The role of bank capital in the propagation of shocks. Journal of Economic Dynamics and Control 34 (3), 555–576.CrossRefGoogle Scholar
Mulligan, Casey B. (2008) Is the Treasury impotent? Economists' Voice 5 (7).CrossRefGoogle Scholar
Poole, William (1970) Optimal choice of monetary policy instruments in a simple stochastic macro model. Quarterly Journal of Economics 84 (2), 197–216.CrossRefGoogle Scholar
Ravenna, Federico and Carl E. Walsh (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar