Loan production and monetary policy

Luca Deidda, Jose Galdon-Sanchez () and Miguel Casares

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: 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.

Keywords: business cycles; external finance; optimal monetary policy (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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https://crenos.unica.it/crenos/node/6768
https://crenos.unica.it/crenos/sites/default/files/WP16-12.pdf (application/pdf)

Related works:
Journal Article: LOAN PRODUCTION AND MONETARY POLICY (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201612

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