Output Gap, Monetary Policy Trade-offs, and Financial Frictions

Francesco Furlanetto, Paolo Gelain and Marzie Taheri Sanjani
Additional contact information
Marzie Taheri Sanjani: International Monetary Fund

Review of Economic Dynamics, 2021, vol. 41, 52-70

Abstract: This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks. (Copyright: Elsevier)

Keywords: Financial frictions; Output gap; Monetary policy (search for similar items in EconPapers)
JEL-codes: C51 C52 E32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2020.07.004
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "Output Gap, Monetary Policy Trade-offs, and Financial Frictions" (2020)
Working Paper: Output Gap, Monetary Policy Trade-offs, and Financial Frictions (2020)
Working Paper: Online Appendix to "Output Gap, Monetary Policy Trade-offs, and Financial Frictions" (2020)
Working Paper: Output gap, monetary policy trade-offs and financial frictions (2017)
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:red:issued:20-29

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2010.07.004

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().