Premium
Optimal Monetary Policy in a Model with Agency Costs
Author(s) -
CARLSTROM CHARLES T.,
FUERST TIMOTHY S.,
PAUSTIAN MATTHIAS
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00329.x
Subject(s) - economics , new keynesian economics , monetary policy , output gap , inflation (cosmology) , phillips curve , agency (philosophy) , welfare , econometrics , microeconomics , macroeconomics , market economy , philosophy , physics , epistemology , theoretical physics
This paper integrates a fully explicit model of agency costs into an otherwise standard Dynamic New Keynesian model in a particularly transparent way. A principal result is the characterization of agency costs as endogenous markup shocks in an output‐gap version of the Phillips curve. The model's utility‐based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium. The paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy. Finally, optimal policy can be expressed as an inflation targeting criterion that (depending upon parameter values) can be either forward or backward looking.