EconPapers    
Economics at your fingertips  
 

Credit Frictions and Optimal Monetary Policy

Vasco Cúrdia () and Michael Woodford ()

No 11016, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads

Keywords: credit spreads; flexible inflation targeting; policy rules; quadratic loss function; target criterion (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11016 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Credit Frictions and Optimal Monetary Policy (2016) Downloads
Working Paper: Credit frictions and optimal monetary policy (2015) Downloads
Working Paper: Credit Frictions and Optimal Monetary Policy (2015) Downloads
Working Paper: Credit frictions and optimal monetary policy (2009) Downloads
Working Paper: Credit frictions and optimal monetary policy (2008) Downloads
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:cpr:ceprdp:11016

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=11016

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2021-07-14
Handle: RePEc:cpr:ceprdp:11016