Monetary Policy and the Financing of Firms

Pedro Teles, Oreste Tristani and Fiorella De Fiore

No 7419, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idyosincratic shocks which may force them to default on their debt. Firms' assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that maintaining price stability at all times is not optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.

Keywords: Bankruptcy costs; Debt deflation; Financial stability; Optimal monetary policy; Price level volatility; Stabilization policy. (search for similar items in EconPapers)
JEL-codes: E20 E44 E52 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP7419 (application/pdf)

Related works:
Journal Article: Monetary Policy and the Financing of Firms (2011)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
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:7419

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7419

Access Statistics for this paper

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