The Financial Friction and Optimal Monetary Policy: The Role of Interest Rate

Salha Ben Salem (), Haykel Hadj Salem (), Nadia Mansour () and Moez Labidi ()
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Salha Ben Salem: University of Monastir
Haykel Hadj Salem: University of Monastir
Nadia Mansour: University of Sousse
Moez Labidi: University of Monastir

A chapter in Contemporary Research in Accounting and Finance, 2022, pp 151-176 from Springer

Abstract: Abstract This article examines the role of financial frictions on real economic fluctuation and monetary policy transmission. We use a Dynamic Stochastic General Equilibrium (DSGE) model with financial friction and price rigidities. In this model, frictions appear, between the bank and the entrepreneur through the financial accelerator, and between the bank and its creditors through the capital channel. We seek to understand how the monetary authorities limited the effects of financial instability by using the interest rate as the main instrument. The results indicate that the financial shock has an enhancing effect on the financial and macroeconomic variables, especially after the revolution of 2011. Besides, we find that if the central bank of Tunisia introduces the financial stability objective on its reaction function it cannot simultaneously stabilize inflation and credit.

Keywords: Financial friction; Augmented Taylor Rule; DSGE Model (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-16-8267-4_6

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DOI: 10.1007/978-981-16-8267-4_6

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