CREDIT MARKET DISTORTIONS, ASSET PRICES AND MONETARY POLICY
Damjan Pfajfar and
Emiliano Santoro
Macroeconomic Dynamics, 2014, vol. 18, issue 3, 631-650
Abstract:
We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects limit the size of the policy rate response to inflation that is consistent with determinacy, so that inflation-targeting policies may not be capable of ensuring REE uniqueness. In this case it is advisable to combine policy rate responses to inflation with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and prevents expectations of higher inflation from becoming self-fulfilling.
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (10)
Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)
Related works:
Working Paper: Credit Market Distortions, Asset Prices and Monetary Policy (2012) 
Working Paper: Credit Market Distortions, Asset Prices and Monetary Policy (2012) 
Working Paper: Credit Market Distortions, Asset Prices and Monetary Policy (2012) 
Working Paper: Credit Market Distortions, Asset Prices and Monetary Policy (2008) 
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:cup:macdyn:v:18:y:2014:i:03:p:631-650_00
Access Statistics for this article
More articles in Macroeconomic Dynamics from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().