Monetary Policy and the Financing of Firms

Fiorella De Fiore (), Pedro Teles () and Oreste Tristani ()

No 7419, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idyosincratic shocks which may force them to default on their debt. Firms' assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that maintaining price stability at all times is not optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.

Keywords: bankruptcy costs; debt deflation; Financial stability; optimal monetary policy; price level volatility; stabilization policy. (search for similar items in EconPapers)
JEL-codes: E20 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-08
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Related works:
Journal Article: Monetary Policy and the Financing of Firms (2011)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
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