Welfare Analysis of Policy Measures for Financial Stability

Ko Munakata, Koji Nakamura and Yuki Teranishi
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Ko Munakata: Bank of Japan
Koji Nakamura: Bank of Japan

No 13-E-1, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability.

Date: 2013-03-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-ger, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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