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LOAN PRODUCTION AND MONETARY POLICY

Published online by Cambridge University Press:  21 June 2017

Miguel Casares ,
Luca Deidda  and
Jose E. Galdon-Sanchez
Miguel Casares*
Affiliation:
Universidad Pública de Navarra
Luca Deidda
Affiliation:
Università di Sassari
Jose E. Galdon-Sanchez
Affiliation:
Universidad Pública de Navarra
*
Address correspondence to: Miguel Casares, Departamento de Economía, Universidad Publica de Navarra, 31006, Pamplona, Spain; e-mail: [email protected].
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Abstract

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms a Taylor-type rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Keywords

External financeOptimal monetary policyBusiness cycles
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 101 - 143
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful to Banco de España for the grant on the project “Política monetaria en economías con fricciones financieras y bancarias.” Luca Deidda gratefully acknowledges financial support from the Italian Ministero dell'Università, PRIN, Fondazione Banco di Sardegna, and Fundacao para Ciencia ea Tecnologia, Portugal. Miguel Casares and Jose E. Galdon-Sanchez also acknowledge Spanish Ministerio de Economía for research project ECO2015-64330-P. We also thank Bassam Fattouh, Ettore Panetti, Paolo Vitale, William Barnett, and two anonymous referees for useful suggestions and discussions on a previous version of this paper.

References

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