Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search

Junichi Fujimoto, Ko Munakata, Koji Nakamura and Yuki Teranishi
Additional contact information
Ko Munakata: Bank of Japan
Koji Nakamura: Bank of Japan

No 1200, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social welfare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macroprudential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces excessive variations in lending and contributes to both financial and price stabilities.

Date: 2018
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Working Paper: Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1200

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