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Loan Commitments and Optimal Monetary Policy

John Duca and David VanHoose

Journal of Money, Credit and Banking, 1990, vol. 22, issue 2, 178-94

Abstract: This paper analyzes how increased reliance on floating rate loan commitments by firms affects the optimal interest-rate-conditioned monetary policy. The analysis uses a stylized Poole-type IS-LM structure that explicitly integrates the interaction between credit and goods markets. By endogenizing the choice between traditional loans and floating-rate commitments, the model can analyze interaction between central bank monetary policy decisions and the choice of loan contract types. A key implication is that, when this joint decision problem is taken into account, the separation between the monetary and goods sectors assumed in the standard IS-LM paradigm breaks down. Copyright 1990 by Ohio State University Press.

Date: 1990
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Working Paper: Loan commitments and optimal monetary policy (1988)
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