LOAN PRODUCTION AND MONETARY POLICY

Miguel Casares, Luca Deidda and Jose E. Galdon-Sanchez

Macroeconomic Dynamics, 2019, vol. 23, issue 1, 101-143

Abstract: We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms a Taylor-type rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Date: 2019
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Working Paper: Loan production and monetary policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:01:p:101-143_00

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