Optimal monetary policy in a [`]sudden stop'

Fabio Braggion, Lawrence Christiano and Jorge Roldos

Journal of Monetary Economics, 2009, vol. 56, issue 4, 582-595

Abstract: In the wake of the 1997-98 financial crises, interest rates in Asia were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. The optimality of the immediate rise in the interest rate is an example of the theory of the second best: although high interest rates introduce an inefficiency wedge into the labor market, they are nevertheless welfare improving because they mitigate distortions due to binding collateral constraints. Over time, as the collateral constraint is less binding, the familiar Friedman forces dominate, and interest rates are optimally set as low as possible.

Keywords: Collateral; constraint; Friedman; rule; Small; open; economy (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-3932(09)00045-2
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Optimal Monetary Policy in a 'Sudden Stop' (2007)
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:eee:moneco:v:56:y:2009:i:4:p:582-595

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().