Open AccessOptimal Monetary Policy in a Model of the Credit Channel *
Author(s) -
Fiore Fiorella De,
Tristani Oreste
Publication year - 2013
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2012.02558.x
Subject(s) - monetary policy , central bank , economics , channel (broadcasting) , political science , business , law and economics , financial system , economic history , monetary economics , computer science , telecommunications
We study a simple extension of the basic new‐Keynesian set‐up in which we relax the assumption of frictionless financial markets: due to asymmetric information and default risk, bank lending rates incorporate a spread over the deposit rate. We demonstrate that financial frictions affect aggregate dynamics mainly through their impact on firms’ financing costs, which increase in both the deposit rate and in the spread between lending and deposit rates. Welfare includes a concern for smoothing these two financial market variables. Our numerical simulations suggest that an aggressive easing of policy is optimal in response to adverse financial market shocks.