Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules

Farah Waheed and Abdul Rashid,

The Journal of Economic Asymmetries, 2021, vol. 23, issue C

Abstract: The current study mathematically derives the monetary policy reaction function (MPRF) by incorporating credit spreads, fiscal imbalances, and monetary policy autonomy. The policy reaction function (PRF) has been derived in the framework of Dynamic Stochastic General Equilibrium (DSGE) model. The model clearly states that capital controls allow the central authorities to focus on the stability of domestic prices instead of worrying about capital outflows. The results of the calibrated model predict that credit spread, fiscal imbalances, and monetary policy autonomy significantly affect the rate of interest. The estimates suggest that most of the variability in output, inflation, and the interest rate occurs due to supply and credit spread shocks.

Keywords: Credit frictions; Fiscal imbalances; Monetary autonomy; Monetary policy rules; Interest rates; DSGE (search for similar items in EconPapers)
JEL-codes: C11 E43 E44 E52 F41 (search for similar items in EconPapers)
Date: 2021
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:eee:joecas:v:23:y:2021:i:c:s1703494920300396

DOI: 10.1016/j.jeca.2020.e00192

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