Loan production and monetary policy

TitleLoan production and monetary policy
Publication TypeJournal Article
Year of Publication2017
AuthorsLG. Deidda, M. Casares, JE. Galdon-Sanchez
JournalMacroeconomic Dynamics
VolumeFirstonline
Pagination1-43
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.

URLhttps://www.cambridge.org/core/journals/macroeconomic-dynamics/article/loan-production-and-monetary-policy/0490685C16A9EDDDD7AEA6B3B37720F3
DOI10.1017/S1365100516001139
Keywordsbusiness cycles, external finance, optimal monetary policy