Welfare Effects of Monetary Policy Rules in a Model with Nominal Rigidities and Credit Market Frictions

Matthias Paustian

No 597, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: This paper evaluates monetary policy rules in a business cycle model with staggered prices and wage setting a la Calvo and asymmetric information in the credit market. Rules are compared in a utility based welfare metric, the effects of the model’s nonlinear dynamics are captured by a quadratic approximation to the policy function. The firms net worth crucially affects the terms of obtaining outside finance. Financial frictions dampen the economy’s response to shocks and make them more persistent. For the baseline calibration, the welfare costs of price stickiness are found to be less than 0.04 per cent of steady state consumption. However, wage stickiness can induce welfare costs of up to 0.85 per cent of steady state consumption. An interest rate rule that places high weight on stabilizing wage inflation can eliminate most of these costs. These findings are by and large independent of the existence of other real distortions in the model, namely credit frictions

Keywords: Monetary policy rules; nominal rigidities; welfare evaluation; quadratic approximation; agency costs; credit frictions. (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:feam04:597

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