Monetary Policy and the Financing of Firms

Fiorella De Fiore, Pedro Teles and Oreste Tristani

No 1123, Working Paper Series from European Central Bank

Abstract: How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’ assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. In our model, allowing for short-term inflation volatility in response to exogenous shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and to engineer a short period of controlled inflation; the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. JEL Classification: E20, E44, E52

Keywords: bankruptcy costs; debt deflation; Financial Stability; optimal monetary policy; price level volatility; stabilization policy (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: 24907
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1123.pdf (application/pdf)

Related works:
Journal Article: Monetary Policy and the Financing of Firms (2011)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091123

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().