Loan production and monetary policy
|Title||Loan production and monetary policy|
|Publication Type||Working Paper|
|Year of Publication||2016|
|Authors||Casares, M, Deidda, LG, Galdon-Sanchez, JE|
|ISBN Number||978 88 9386 006 2|
|Keywords||business 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.