Monetary Policy and the Financing of Firms

Fiorella De Fiore, Pedro Teles and Oreste Tristani

American Economic Journal: Macroeconomics, 2011, vol. 3, issue 4, 112-42

Abstract: How should monetary policy respond to changes in financial conditions? We consider a simple model where firms are subject to shocks which may force them to default on their debt. Firms' assets and liabilities are nominal and predetermined. Monetary policy can therefore affect the real value of funds used to finance production. In this model, allowing for inflation volatility in response to aggregate shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates and to engineer some inflation; and the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. (JEL G32, E31, E43, E44, E52)

JEL-codes: E31 E43 E44 E52 G32 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mac.3.4.112
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Citations: View citations in EconPapers (40)

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Related works:
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)
Working Paper: Monetary Policy and the Financing of Firms (2009)
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