Understanding Monetary Policy: The Real Sector and Welfare

Marcella Lucchetta (lucchetta@unive.it)
Additional contact information
Marcella Lucchetta: Department of Economics, Ca' Foscari University of Venice

No 2023:01, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This paper shows theoretically the linkages among monetary policy rate, the real sector demand for loans with supply shocks, aggregate risks, and social welfare. We prove that a) when the loans' demand is elastic bank competition and the policy rate decrease risks and increase the amount of lending to firms b) these effects are reinforced as the number of banks in the banking market raises. We provide theoretical support to the empirical findings that a competitive environment, or an elastic demand for investments, renders the monetary policy more effective and increases welfare (Aghion et al 2019), on the contrary, uncompetitive structures obtain opposite effects (Wang et all 2022). The policy implications are that the welfare maximizing policy rate can be lower it could be lower than set by the Central Bank when there is high inflation (Rogoff, 2017). c) As in this economic phase of perfect diversification difficulties because of aggregate risks, the policy rate is more effective in welfare increasing if the banking sector is competitive.

Keywords: Monetary policy; bank competition; risk-taking and banking market structure; investment demand elasticity; aggregate risk and social welfare. (search for similar items in EconPapers)
JEL-codes: D4 D61 G2 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.unive.it/web/fileadmin/user_upload/dip ... _lucchetta_01_23.pdf First version, anno (application/pdf)

Related works:
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:ven:wpaper:2023:01

Access Statistics for this paper

More papers in Working Papers from Department of Economics, University of Venice "Ca' Foscari" Contact information at EDIRC.
Bibliographic data for series maintained by Sassano Sonia (wp.dse@unive.it).