Loan production and monetary policy

TitleLoan production and monetary policy
Publication TypeWorking Paper
Year of Publication2016
AuthorsM. Casares, LG. Deidda, JE. Galdon-Sanchez
Publication Languageeng
ISBN Number978 88 9386 006 2
Keywordsbusiness cycles, external finance, optimal monetary policy

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 Taylor (1993) 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.

Citation Key6768
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