Financial friction and optimal monetary policy: analysis of DSGE model with financial friction and price sticky

Salha Ben Salem () and Moez Labidi ()
Additional contact information
Salha Ben Salem: FSEG of Mahdia
Moez Labidi: Arab Planning Institute

SN Business & Economics, 2024, vol. 4, issue 7, 1-24

Abstract: Abstract The paper analyzes the effectiveness of standard and augmented monetary policies in the case of financial and real shocks. We use a Dynamic Stochastic General Equilibrium Model (DSGE model) with various financial frictions and price sticky. Based on this model, we examined the effectiveness of four augmented Taylor rules with five policy regimes. Our results show that, relative to the standard Taylor rule, the effect of the boom-bust process on financial variables and output is improved when the Central Bank follows an augmented Taylor rule, but at the expense of inflation. We also find that leaning against the wind (LATW), in particular against credit to GDP growth, helps the Central Bank of Tunisia (CBT) to achieve its mandate following financial shocks, even if the CBT only cares about price and output stabilization (LF1). Moreover, we show that LATW should be coupled with a strong reaction to inflation and an aggressive reaction to the credit-to-GDP ratio. The result of this paper represents a starting point for Tunisian policymakers to examine and evaluate two monetary policy rules under various regimes in Tunisia, especially since the CBT does not have, until today, a specific DSGE model.

Keywords: Credit vulnerabilities; Financial friction; Optimal monetary policy; DSGE model (search for similar items in EconPapers)
JEL-codes: E4 E5 E52 G1 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s43546-024-00679-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:spr:snbeco:v:4:y:2024:i:7:d:10.1007_s43546-024-00679-6

Ordering information: This journal article can be ordered from
https://www.springer.com/journal/43546

DOI: 10.1007/s43546-024-00679-6

Access Statistics for this article

SN Business & Economics is currently edited by Gino D'Oca

More articles in SN Business & Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().