Loan production and monetary policy

TitleLoan production and monetary policy
Publication TypeJournal Article
Year of Publication2019
AuthorsDeidda, LG, Casares, M, Galdon-Sanchez, JE
JournalMacroeconomic Dynamics

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.

Keywordsbusiness cycles, external finance, optimal monetary policy