Financial Frictions, the Phillips Curve and Monetary Policy

Philipp Lieberknecht

MPRA Paper from University Library of Munich, Germany

Abstract: How does the presence of financial frictions alter the Phillips curve and the conduct of optimal monetary policy? I investigate this question in a tractable small-scale New Keynesian DSGE model with a financial accelerator. The accelerator amplifies shocks, decreases the slope of the Phillips curve and renders forward-looking behavior more relevant for current macroeconomic dynamics. I show analytically that these three factors imply an inflationary bias of discretionary monetary policy relative to the standard model and a stabilization bias relative to commitment policy. A conservative central banker who places a larger weight on inflation stabilization than society is able to reduce both biases and closely mimics the optimal policy under commitment. The required degree of inflation conservatism increases in the degree to which financial frictions are present.

Keywords: Financial frictions; financial accelerator; Phillips curve; missing disinflation; optimal monetary policy; discretion; commitment; inflation conservatism; inflation targeting (search for similar items in EconPapers)
JEL-codes: E4 E42 E44 E5 E52 E58 (search for similar items in EconPapers)
Date: 2018-10-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/89429/1/MPRA_paper_89429.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/89713/1/MPRA_paper_89713.pdf revised version (application/pdf)

Related works:
Working Paper: Financial frictions,the Phillips curve and monetary policy (2019)
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:pra:mprapa:89429

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().