Banking competition, collateral constraints and optimal monetary policy

Javier Andrés (), Oscar Arce () and Carlos Thomas

No 1001, Working Papers from Banco de España

Abstract: We analyze optimal monetary policy in a model with two distinct financial frictions. First, borrowing is subject to collateral constraints. Second, credit flows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: inflation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both financial and non-financial shocks, the optimal monetary policy commitment implies a short-run trade-off between stabilization goals. Such policy tradeoffs become amplified as banking competition increases, due to the fall in lending spreads and the resulting increase in financial leveraging.

Keywords: banking competition; lending spreads; collateral constraints; monetary policy; linear-quadratic method (search for similar items in EconPapers)
JEL-codes: E32 E52 G10 G21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-02
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (27)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/10/Fic/dt1001e.pdf First version, February 2010 (application/pdf)

Related works:
Journal Article: Banking Competition, Collateral Constraints, and Optimal Monetary Policy (2013)
Journal Article: Banking Competition, Collateral Constraints, and Optimal Monetary Policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1001

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